- Duke, lacrosse, and the accusations that have never gone away William Cohan, Vanity Fair
- How James Burnham won the Cold War for the West Francis Sempa, Claremont Review of Books
- Common sense and the American frontier RealClearHistory
- Why the GOP is wrong about work Rachel Lu, the Week
Three Lessons on Institutions and Incentives (Part 7): Breaking the mold
This role of entrepreneurs also depends on an abstract characteristic of technological knowledge: it works in a manner contrary to that of most goods, since it is more productive to the extent that it is more widespread in the population. This characteristic of the abstract nature of technological knowledge is related to the phenomenon of the combination of skills (matching of skills): the negative side of creative destruction lies in substitution phenomena (a computer program of inventory management increases the productivity of work saving the salaries of the army of employees who used to carry them with pencil and paper), but the positive side comes from the phenomena of complementarity.
As William Easterly exemplifies, the cardiac surgeon will be more productive in a first world hospital, where he will have specialized nurses, other qualified doctors like him, a sophisticated system of hospital administration, and so on, being the only cardiac surgeon in a hospital. city of the third world, where it does not have professionalized nurses, nor the help of other medical colleagues, working in a hospital in which he himself has to deal with administrative issues. If there were only substitution relations, it would be convenient for a doctor to practice his profession in the most remote place possible. However, as relations of complementarity of knowledge exponentially increase the productivity of the professionals involved, the doctor will find it more convenient to practice in a health center that has the largest number of doctors and paramedics possible.
The latter does lead to the phenomenon of “traps”: any rational agent, who maximizes the utility of their choices will be discouraged to deepen their studies if they perceive that they can not give any use to their education. There are the cases in which a person discovers that in his country there is no technology or the necessary number of professionals to develop a specific activity, or that, existing, you will find prohibited the exercise of their profession based on restrictions regarding their race, caste, social class, sex, etc. Since, rationally, a person who is included in a particular group under which he will be found forbidden or will be hindered the exercise of his profession, he will find as the most rational of their alternatives to abandon their studies, so that their chances of progress will no longer be limited only by legal or social barriers, but because of their lack of suitability for high-paying functions. Such are the so-called “poverty traps.”
There are also wealth traps. There are those cases in which the individual knows that he is within a favored group or in which he knows a large number of professionals and, therefore, invests time and money in his education because he knows that he has high chances of success, which will then be confirmed. Obviously, such phenomena of divergence generates another problem, addressed both by Easterly and by Daron Acemoglu & James Robinson, which is that of polarized societies.
Easterly affirms that it is the exchange of goods and services, through the mutual benefits that they report to the parties that participate in it, the main source of wealth generation. Where individuals are allowed to exchange, in a stable institutional framework with a stable currency, is where prosperity flourishes. However, Easterly recognizes that bad luck can devastate nations, as are the cases of geological and climatic phenomena such as earthquakes, tsunamis or mudslides, as well as recognizing that the situations of individuals involved in a poverty trap can only be resolved through an active public policy that not only provides education, but also establishes the conditions so that the recipients of that educational system can count on certain expectations that they will be able to apply that knowledge acquired through education and that, consequently, it is reasonable to study.
Just as the bad star can affect the economic performance of the countries, so can a favorable conjuncture, such as the case of a transitory improvement in terms of exchange of a given country. But this favorable circumstance can become a counter-march. Easterly explains that, for a simple statistical matter, it is very difficult for both a nation and an individual to always remain on the crest of the wave, over the years everything tends to return to the average. The problem occurs when a country -or a person, too- got used to a certain level of spending in the boom years and intends to maintain it through debt or emisionism. We come to the cases in which, according to Easterly, the government can “kill the growth.” Public debt and inflation generate capital consumption and, consequently, poverty.
Another way that governments have to discourage growth is through corruption. Not only because it means a transfer of resources from productive activities to unproductive activities, but because it also means a bad signal for citizens. However, in cases of corruption, as noted above, wealth at least changes hands. There is another case, even more pernicious, in which the government’s actions, whether motivated by corruption or inspired by good intentions, destroy wealth, without even redistributing it: this is the case of inconsistent public policies derived from highly polarized societies.
Public policies that aim to favor a given industry, but at the same time need to agree on measures with other sectors of the economy, whose purpose is to compensate for the losses generated by those policies, can lead to a tangle of inconsistent regulations that, instead of transfer riches from one sector to another, directly destroy them. For example: exchange controls harm the export sector, since they generate black markets. The exporters will have costs that will be partly quoted according to the black market prices (which are higher) and they will have to liquidate the value of their exports at the official exchange rate, which will be lower. Regulations of this kind may not involve acts of corruption, but they do destroy wealth, which there is no way to recover.
Easterly lists numerous examples of everything that needs to be done to destroy growth. However, there is something that deserves to be especially highlighted: the progress or stagnation of nations does not depend on educational, cultural or geographic factors, but rather on the incentive framework that predominates. This incentive framework will always be abstract, that is, it can be applied at any time and place.
[Editor’s note: Here is Part 6, and here is the entire, Longform Essay.]
Nightcap
- Conscientious refusal to plea bargain Irfan Khawaja, Policy of Truth
- Fukuyama’s Origins of Political Order Branko Milanovic, globalinequality
- How the communists re-educate Muslims James Millward, ChinaFile
- The counterfactual histories of Nazi Britain Catherine Gallagher, Aeon
Three Lessons on Institutions and Incentives (Part 6): Breaking the mold
Daron Acemoglu & James Robinson acknowledge that the weakest point of their theory consists of recommendations to “break the mold.” How to change the historical matrix that leaves the nations stagnant in extractive political and economic institutions, or that move them back from having inclusive economic institutions with extractive political institutions to being trapped in exclusively extractive institutions with the risk of falling into a failed state. This brings us to Douglass C. North and his theory of institutional change.
Although he published works before and after Institutions, Institutional Change and Economic Performance, this book can be taken as the archetypal expression of neo-institutionalism. In the United States, institutionalism, whose main speaker was the Swedish immigrant Thorstein Veblen, was the local expression of what in Europe was known as “historicism”: a romantic current, inspired by Hegelian idealism, which denied the universal validity of institutional rules and claimed the particularism of the historical experience of each nation. American historicism was called institutionalism, because it concentrated the sciences of the spirit in the empirical study of the institutions given in the United States.
On the contrary, North’s school is called “neo-institutionalist” because it does exactly the opposite: it studies the phenomenon of institutions from a behavioral point of view and, therefore, universal. As already noted here, for North institutions are limiting the choice of the rational agent in his context of political, economic and social interaction. These limitations are abstract; that is, they are not physical, like the law of gravity, nor do they depend on a specific and specific order of authority. Examples of these abstract limitations can be found in social customs and uses, in moral rules, in legal norms insofar as they are enunciated in general and abstract terms.
Attentive to such diversity, Douglass C. North groups institutions in formal and informal. Within the formal institutions we find, unquestionably, the positive law, in which its rules of formation and transformation of the statements that articulate them can be identified very clearly. In a modern democracy, laws are sanctioned by the legislative body of the State. Meanwhile, the rules of formation and transformation of statements concerning morality are more diffuse – previously, Carlos Alchourrón and Eugenio Buligyn, in Normative Systems, had used this distinction to support the application of deontic logic to law, since deontic statements of law are much more easily identifiable than those of morality.
On the other hand, North distinguishes two types of institutional change: the disruptive and the incremental. An example of disruptive institutional change can be a revolution, but it can also be a legislative reform. The sanction of a new Civil Code, entirely new, can mean a disruptive change, while partial reforms, which incorporate judicial interpretative criteria or praetorian creations, can be examples of incremental changes.
Institutional changes do not necessarily have to come from their source of creation or validity. Scientific discoveries, advances in transport and telecommunications, information technologies, are some of the innovations that can make certain institutions obsolete or generate a new role or interpretation for it, depending on the open texture of the language.
Therefore, following the tradition of Bernard Mandeville and Adam Ferguson, neo-institutionalism admits that there are unintended consequences in the field of institutional change. Not only the incremental change of institutions, be they formal or informal, depends largely on changes in the cultural and physical environment in which institutions are deployed. Also the disruptive and deliberate change of a formal institution can generate unforeseen consequences, since it is articulated on a background of more abstract informal institutions.
Both Acemoglu & Robinson and North acknowledge that there is no universal law of history that determines institutional change -i.e., they deny historicism, as Karl R. Popper had defined it at the time-; what we have, on the other hand, is an “evolutionary drift,” a blind transformation of institutions. In this transformation, political will and environmental conditions interact. The latter not only limit the range of options for the exercise of “institutional engineering,” but also introduce an element of uncertainty in the outcome of such institutional policies, the aforementioned unintended consequences.
Much more complex is to identify which components are included in that black box that is called “environment” (environment). In principle, there could reappear the creatures that both William Easterly and Acemoglu & Robinson had banished from their explanations: the geography, culture and education of the ruling elites; more sophisticated elements such as the one referred to in the previous paragraph could also be incorporated: technological change. However, the discoveries of science would have no impact if the institutional framework pursued “creative destruction”, seeking to protect already installed activities from competition, or a lifestyle threatened by technological innovation.
We arrive here at a seemingly paradoxical situation: the institutions’ environment is the institutions. Using the Douglass North classifications system, one could try as a solution to this paradox the assertion that formal institutions operate on the background of informal institutions, which escape political will, and that disruptive institutional changes occur in a context of other institutions that are transformed in an incremental way. From this solution to reintroduce culture as a factor of ultimate explanation of institutional change, only one step remains.
At the other extreme, following the typologies used by Acemoglu & Robinson, the institutions can be political or economic and these in turn can be extractive or inclusive, jointly or alternatively. Inclusive economic institutions within a framework of extractive political institutions can result in a limitation of creative destruction and, consequently, produce a regression to extractive economic institutions. In the institutional dynamics of Acemoglu & Robinson, history can both progress and regress: from economic institutions and extractive policies it can be involuted even to situations of failed state and civil war. To reach the end of history, with inclusive institutions, seems to depend on the conjugation of a series of favorable variables, among which is the political will; while to fall back into chaos and civil war it is enough to let go. Without looking for it, the conceptual background of Why Nations Fail rehabilitates the thesis of Carl Schmitt insofar as it presupposes that in the background of human interaction there is no cooperation but conflict.
For his part, William Easterly in The Elusive Quest for Growth does not ask these questions, but simply works under a hypothesis that already has it answered: whenever there is human interaction, there will be a framework of incentives and such a framework of incentives will have certain universal characteristics. Douglass C. North’s central concern in Institutions, Institutional Change, and Economic Performance, as well as that of Acemoglu & Robinson in Why Nations Fail, was to establish patterns of events and conditions that made some nations be prosperous while others could not emerge from stagnation. That is, they are works that must necessarily be about the differences between one country and another and, therefore, emphasize the different conditions. Notwithstanding that both North and Acemoglu & Robinson expressly shun culturalist explanations, but instead postulate abstract models and typologies of institutions and institutional change to be applied universally, when the moment of exemplification arrives, they must necessarily resort to the differences between countries and regions. While it is true that both books resort to the description of the problems of the southern United States when illustrating how certain institutions generate results similar to those of third world countries, the culturalist explanation is always available.
In contrast, William Easterly in his The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics focuses almost exclusively on countries with low economic performance and only tangentially refers to cases of high performance. Therefore, in his work, the empirical analytical tools used to dissect it are well separated. To do this, Easterly will not only use a utility-maximizing rational agent model, but will also enunciate abstract models of universally valid human interaction.
In the first part of the work, Easterly describes the failed panaceas of growth: direct aid, investment, education, population control, loans to make adjustments and subsequent debt forgiveness. Affirms that such policies invariably failed because they did not take into account the basic principle of the economy that indicates that people respond to incentives (people respond to incentives, a statement that is repeated as a mantra throughout the book). While acknowledging that in some cases of extreme poverty and bad luck it is necessary for governments to take direct action to help people escape from poverty traps, the author proposes as the main means for people to take a path of prosperity: work to establish the right incentives. It clarifies, however, that this should not be a new panacea but a principle to be implemented little by little, displacing the layers of vested interests impregnated with the wrong incentives and allowing the entrance of the right incentives.
These incentives, right or wrong, do not depend on the culture, nor on the education of the elites, nor on geography. On the contrary, they consist of abstract models of human interaction, which can materialize at any time or latitude. Since the main interest of The Elusive Quest for Growth is, precisely, growth, such models concern this matter, but nothing prevents future research from identifying other abstract patterns of behavior that allow us to infer incentives to address other issues, such as crime, equity, violence, etc.
Some incentive structures that Easterly describes in relation to the problem of growth are the following: conditions for increasing returns – instead of decreasing ones – that come from technological innovation, which in turn depend on phenomena identified as “leakage of technological knowledge” (leaks of technological knowledge), “combination of skills” (matches of skills) and traps (traps) of poverty -although there are also wealth traps.
Technological knowledge has the capacity to filter into a population because it is mainly abstract. It can be exemplified in an accounting system, the practice of carrying inventories, literacy, techniques and procedures for the production, distribution and sale of products, etc. If the technological knowledge consisted exclusively of physical machinery, then yes it would be to a point where yields would become decreasing. On the contrary, understanding technological knowledge as consisting of “abstract machines”, it acquires the characteristics of a public good: it is not consumed with its use nor can it be exclusive. This is how technological knowledge can be extended in a society, multiplying the productivity of its members without entering into diminishing returns.
Also, following the ideas of the recent Nobel Prize in Economics Paul Romer, Easterly highlights that technological change can generate increasing returns thanks to the work of an endogenous agent of the economy, the entrepreneur. Being the labor force a fixed factor of production with respect to machinery, it is expected that, at a certain point, capital will generate diminishing returns, thus conditioning the growth rate of an economy (the main concern of The Elusive Quest for Growth). For its part, the entrepreneur is not only that agent of the economy who discovers new business, he also discovers new uses for existing capital goods. Easterly does not mention it, but this is also the main conclusion reached by Ludwig Lachmann in his work Capital and Its Structure. This work of the entrepreneurs, to find a new utility for a set of capital goods that had come to generate diminishing returns, making them continue to generate increasing returns is what frees the rate of growth of the economy from the limits of technological change and, in turn, makes it depend on the endogenous factor of the economy: the incentives for entrepreneurs to develop their activity -which some call creative destruction.
[Editor’s note: Here is Part 5 and here is the entire, Longform Essay.]
Mending Wall
Robert Frost’s lovely poem, “Mending Wall,” says something profound about the importance of the institution of property. The poem is about Frost and his neighbor meeting together to piece together a crumbling wall between their two properties. Frost pokes fun at the tradition; without a wall, will Frost’s apple trees sneak across the property line and gobble up the cones piled up beneath the neighbors’ pines? As the two walk the line, replacing a stone here and a stone there, the neighbor, in an almost ritualistic mantra, responds to Frost’s skepticism with the well-worn line, “Good fences make good neighbours.”
Some can and have interpreted Frost’s poem as a gentle argument against erecting barriers that separate us. I think that’s a mistake. Of course, I admit to overlaying my own political and philosophical views atop his writing. But with that in mind, the poem tells me to that clear property lines do indeed make good neighbors. In fact, this wall is what draws Frost and his neighbor together in a valuable social ritual. Even in the absence of an obvious need for the wall, the tradition stokes good will.
In a broader and more directly political sense, property does indeed make good neighbors. Where property rules are unclear or have not been established, social strife and distrust tend to proliferate. Where they are established by law or custom, parties have a neutral arbiter whose presence alone allows them to avoid dispute and uncertainty.
This seems to hold true on small and large scales. Parents of young children have all learned that allowing kids common ownership of toys is a recipe for constant conflict. If parents establish clear ownership of childrens’ possessions, then order settles in and kids can learn important social values like sharing–a virtue that will never arise if property rules are unclear or non-existent. Truly, in a home of common ownership, children only learn to cling desperately to everything and not give an inch.
The same appears true for communities and nations. Where countries do not have established customs and laws governing property, strife, distrust, and corruption fester (Russia is, unfortunately, a prime example of this problem). A similar phenomenon seems to have played its role in the rapid demise of the various utopian communal arrangements that cropped up during the Second Great Awakening in 19th century America.
Frost’s repeated refrain throughout his poem is: “Something there is that doesn’t love a wall.” I think Frost’s neighbor had the right of it–communities survive and thrive thanks to walls. We should take time to mend them.
Nightcap
- Media criticism and left wing nostalgia Jessica Werneke, Not Even Past
- Wealth isn’t a blob of consumable stuff Don Boudreaux, Cafe Hayek
- Camp of the Saints and right wing nostalgia Chelsea Stieber, Africa is a Country
- The eclipse of the natural law Nathaniel Peters, Law & Liberty
Three Lessons on Institutions and Incentives (Part 5): “Spontaneous” institutions
When Friedrich A. Hayek referred to the coordination problems among rational agents as a consequence of the dispersion of information in the economic system -and that made him worthy of the Nobel Prize in Economics- he did not refer to an information problem that could be solved with better statistical tools. This is also a problem of the economics of information and what Hayek himself called “limit relative to knowledge,” since the frontiers of science could be continuously extended, generating more and more information. The limit that Hayek qualified as absolute for knowledge came from the increasing degrees of abstraction and complexity characteristic of any “extended society.” This to the point of calling such phenomena spontaneous orders, or abstract or extended. Such orders allowed the prediction of the general configuration of the system, but they made impossible the concrete prediction regarding the relative position of each particular element of the system. If one looks for an example of such an institutional arrangement, Hayek himself would point as such to the legal systems that structured the mercantile communities, not because they lacked legislation or a state that monopolized its enactment, but because it provided the members of such a mercantile community of a dispute resolution system whose complexity acted as a guarantee of impartiality.
There is much talk of the virtues of institutions as guarantors of predictability, or legal security, or political stability and clear rules of the game. All of them are positive qualities that express the favorable consequences of a negative quality -negative not in the sense of pernicious, but of absence of a particular characteristic- that can be defined as “absence of arbitrariness.” In general, the concept of freedom is related to that of “free will,” which is very desirable for those who exercise it, but it could become a hell for those who suffer the free will of a third party. The institutions are, as it was pointed out, abstract limitations to the social human action that are structuring of the political, economic, and social interaction; in other words, they limit the arbitrariness of the decisions of own and third parties.
In a certain sense, institutions limit individual freedom, whether we define it in a positive way -as the faculty to exercise its own free will in a legitimate way- or negative -like the absence of coercion to exercise one’s free will. However, for the definition of freedom as absence of domination or absence of arbitrary coercion (similar to that coined by Quentin Skinner), institutions cease to be limiting of individual freedom to be functioning as the abstract devices that make it possible.
An institution is made up of a set of rules that not only limits the action of the rational agent and the action of a third party, but also limits, fundamentally, the actions of the political authority. The said procedural due process, for example, belong to the category of institutions that limit governmental action: no one can be punished except by a judgment based on a law prior to the fact of the process and dictated by its natural judges. The due process is not exhausted in this formulation, but this already constitutes in itself a strong restriction to the power of the government over the citizens. These limits make foreseeable the actions of the government that can interfere in the free will of the individuals and, therefore, define their spheres of autonomy.
Of course, although an institution by itself provides stability and predictability to the system and this generates dividends in terms of the coordination of expectations and individual plans, not all institutions are equally efficient if the mentioned predictability is taken as an evaluation parameter. A system of multiple castes, for example, depends on numerous but ambiguous indicators for the identification of each individual, necessary for the purpose of determining what rights and obligations that person owns. In contrast, a modern system, at the other end of the arch, which equates, with the exception of certain political rights, citizens with inhabitants, and agrees equal rights and obligations for anyone who proves distinctive features of humanity, drastically reduces the “transaction costs” of a system of social control structured around abstract institutions.
The summum of arbitrariness can be identified in despotic systems, in which the free will of the ruler or the group of rulers finds no abstract limit in the law -only concrete limits of other more powerful ones. In these systems, the rules are mere orders to the subjects that have a changing and unpredictable content. In any case, if there are positive laws, we are not facing the rule of law, but government through law. When a case of such extreme arbitrariness is exercised from one man to another, we call it slavery or, in the best of cases, servitude.
At the other pole of the arch we have, as has been pointed out, the modern system, which recognizes in each individual the inalienable right to exercise his free will within a sphere of autonomy that is equal for all. Thus, in a system of isonomy, knowing the limits of the sphere of autonomy itself, the limits of the spheres of autonomy of the third parties are known and, consequently, each individual can form expectations regarding a range of expected behavior of his fellows. They will have a high degree of certainty, as will their respective plans.
In the middle of the two poles of these two ideal types of legal-political systems we have the range of possible and specifically given societies, in which freedom as absence of arbitrary coercion (in the meanings given by both Skinner and Hayek) verify to a greater or lesser extent. What Daron Acemoglu & James Robinson do in this regard, is to open two axes of institutional analysis: the political and the economic, and in turn introduce the distinction between extractive and inclusive institutions. Extractive institutions would be halfway between despotism and isonomy: there are limiting rules of free will, but they are not equal for all, fundamentally restricting the right to access certain prerogatives: limitations on access to food, of political decisions or legal monopolies, to cite examples.
It is worth remembering that the birth of individual rights took place, primitively, as prerogatives that the powerful took from the despot. Such is the case of the Magna Carta of 1215. That is why it is said that rights do not pre-exist the individual but that they are conquered. These prerogatives that were pulling the sovereigns one by one and that is why there is no talk of “liberty” in the singular, but of “liberties”: of trade, of industry, of speech, of transit, etc. These prerogatives or liberties were initially torn from the ruler by militarily or financially powerful men and then extended to the rest of the inhabitants, to the point of recognizing their ownership every human being. Correlatively, by virtue of this process of institutionalization, in which each new prerogative was taken from the ruler, this implied a new limit to governmental power, so that the political system was evolving from tyranny to a constitutional system.
Following the course of this evolution, Acemoglu & Robinson work with the ideal substitute types of “failed state” and “modern state,” the complementary ideal types of “political institutions” and “economic institutions” and again with ideal substitute types of “extractive institutions” and “inclusive institutions.” Political democracy, with a plurality of voices and the extension of political rights, as to elect and be elected to public office, means the realization of inclusive political institutions. An economy that enjoys of sound money, a balanced public budget, openness to international trade, free access to markets, absence of legal monopolies and regulation of natural monopolies is the example of what inclusive economic institutions mean. For all this, we need a degree of political centralization crystallized in the modern state, which enforces the law, whose prescriptions must establish a public sphere whose administration the rulers must be accountable of.
Obviously, the analytical instruments of Acemoglu & Robinson are useful both in political and economic liberalism and, although they do not make a total use of almost three centuries of doctrinal and philosophical elaborations, their classification system is susceptible of being deepened by the incorporation of such concepts. For example, on the end of Why Nations Fail, the authors are at the crossroads of answering the question that serves as the title for the work. For this, they allude to the fact that certain critical situations cause a country to take one or another path: the development of inclusive political and economic institutions or the fate of stagnation, but that there is no such thing as a general law of history that determines that one or the other path will be taken forcibly at some specific historical moment.
This is how the authors invoke, timidly and tangentially, the current of cultural evolutionism, according to which the social customs and habits are evolving following the changes in environmental conditions, but without having a predetermined course, following an evolutionary drift. In the same way, they could have explained the institutionalization that the emerging state implies a modern state through the names and procedural principles that are previously in the uses and customs that make up private law. This is how Max Weber explained it and such studies can be used to delve into the historical analyzes formulated by Acemoglu & Robinson when answering why countries fail.
Notwithstanding this, these economists do establish certain patterns of institutional evolution that are apt to be applied when designing public policies or, plain and simple, a government program. In this sense, they allude to cases such as those of Argentina in the late nineteenth and early twentieth centuries, which had a resounding success at the moment of formal institutionalization through the enactment of a written constitution and the establishment of a central government of a federal nature. As explained by Acemoglu & Robinson, Argentina incorporated inclusive economic institutions, while it was slower to leave behind extractive political institutions. Initially, Argentina was strongly benefited by the “catch up” regarding the degree of progress of its economic partners, mainly England.
However, following these evolutionary patterns, sooner or later a crucial point is reached in which, in order for the economy to continue to progress, higher levels of competition must be developed that make it necessary to tolerate the impact of the so-called “creative destruction.” When the political system is extractive, it is much easier to resist innovation in the economic sphere when it threatens their economic rents. Arriving at that stage, there are the conditions given for the economic and political progress of a country to be reverted to extractive economic institutions.
That is to say, with inclusive institutions, both politically and economically, it becomes more difficult to find shortcuts to the sectors threatened by the creative destruction of all innovation that progress brings, in order to neutralize it. Once the regulatory, interventionist and protectionist apparatus that characterizes the extractive economic institutions is assembled, the contest moves to the political level: whoever has the springs of political power will distribute the benefits of the economic system. If we add to this a polarized society, it is not difficult to explain why the alternation of popular governments emerged from popular democracies and military civic coups. Specifically, in the case of Argentina, Acemoglu & Robinson add the factor of justice: for a country to be involved in such a spiral of institutional involution, it was necessary for justice to lose its independence from political power.
[Editor’s note: Here is Part 4; here is the entire, Longform Essay.]
Bourgeois II: place in the world
Quite recently, I was reading musicologist Martha Feldman’s book The Castrato: Reflections on Natures and Kinds, which is, unsurprisingly, a study on the castrato and the music written for the voice type during the 17thand 18thcenturies. The concept is exactly what it sounds like – a male singer whose physical development was surgically ended in order to preserve his access to the high soprano range. The surgery in theory created an ideal singer because his head and ribs continued to grow to normal male size, creating someone with tremendous lung capacity and also large head space which created greater resonance.
For anyone who might be wondering, no, castrati did not sing female roles; the type was still male in identity and was often associated with nobility or demi-gods in character casting. Incidentally, the practice of castrati eventually led to the operatic custom, beginning in the late 18thcentury, of mid-range female singers (mezzo-sopranos) singing the roles of young males because as religious and civil laws cracked down on the creation of castrati, this particular type of singer gradually disappeared, even as the music written for them increased in popularity. By the time Mozart wrote Le Nozze di Figaro(1785 – 86) and La Clemenza di Tito(1789), the roles of the junior males, Cherubino and Annio respectively, were written for women singers from the outset.
The aspect that was, for me, quite interesting about the castrati was the level to which a concept which musicians more or less take for granted stemmed from larger social, legal, and cultural changes in Europe in the late 1500s. Explaining the castrato’s history in Italy, where the practice originated, Feldman mentioned philosopher and sociologist Jürgen Habermas and his work, particularly on the “weakening of industrialization and the refeudalization of Europe” following the Renaissance. More directly related to the trend of castrati, Feldman wrote:
Most of the time first sons were excluded (from castration in order to make a castrato) because primogeniture was the rule in Italy, hence first sons were heirs, breeders, and eventual legatees, though very poor or very ambitious families sometimes did have first sons castrated, including the family of Handel’s principal castrato Senesino (Francesco Bernardi), whose older brother was a castrato, and first son Gaetano Berenstadt (1687 – 1734), of Tyrolean descent, who ended up caring extensively for his family’s needs (Feldman, 13).
And further explained,
If some form of patriarchy had long been the rule, patriliny by contrast took root in a historically precise way only around 1570, as we have glimpsed above [a preceding paragraph on the combination of increased lifespan and the introduction of estate entail in Italy]. Prior to that time the ideal had been to marry off all or most sons to increase a family’s power not just vertically but horizontally, within a wider network of kin, with the goal of fortifying the clan as a whole. With the marrying off of first sons only, a situation arose in which younger sons were typically consigned to military or ecclesiastical careers and thus formally speaking to legal or effective celibacy at the same time as most upper-class daughters entered convents. Both strategies intensified with the severe economic crisis of the seventeenth-century, but the practice continued afterward, albeit with increasing tendencies toward diversification (45).
Before 1570, the law of entail was not prevalent in continental Europe, which also tended to include females in the line of succession – Salic law applied only to the throne in the case of France, so noble women could and did inherit their parents’ property. Since one of the central points of the Counter-Reformation was ending the abuse of Catholic religious facilities, either as retirement homes for dowagers or as cold-storage for spare heirs once their elder brother fulfilled his duty, convents, monasteries, and the priesthood quickly became unviable career options, at least for the aristocracy.
This little tweak to Canon Law had two effects: 1) the Catholic clergy gradually ceased being a profession as such, which resulted in an increased number of non-elites joining voluntarily and rising to high places, and 2) the performing arts, particularly music, exploded as the young men enrolled in ecclesiastical preparatory schools and originally destined for careers in the Church had to find new avenues for their skills. On a side note, the struggle to enforce the new regulation took centuries, was closely related to the battle for separation of church and state, and it is a story for another time.
The point to this tale is the response of the younger sons to their change in fortunes and status. Being in cathedral schools, and even more impractically in music-specialist cathedral schools, at first glance there was not much use for what these young men could do in the secular world. They were fluent in Latin, usually had a good command of Greek, frequently had a solid understanding of modern European languages and literature in general, and they were competent musicians. In a world that not only was still largely agrarian but was also “refeudalizing” into a system where they were, on the one hand, very much locked into the expectations of their caste – an impoverished younger son was still an aristocrat – while simultaneously being locked out of any claim to family property, the position of these men appeared hopeless.
Instead of giving in to the circumstances, though, these men went out and turned their skills into an industry – classical music as we know it. They taught it, wrote it, and developed it into a dominant art form. Some found multivariant use for their “irrelevant” skills. For example, the castrato Carlo Broschi (1705 – 1782) didn’t use his real name out of respect to his aristocratic family, performing under the name Farinelli. However, his birth and skill with languages also caused him to be appointed a diplomat-at-large and it was not uncommon for him to be in cities, such as London or Madrid, for opera engagements and be suddenly called upon to go to the royal court and help sort out a diplomatic issue. When he died at the unusually old age of 77 (a perfect example of Jonah Goldberg’s point about Second Sons as both victims and beneficiaries of the upper-classes having better medicine), he left behind a fortune, which in a delightful ironic twist bailed out his elder brother’s family.[1]What is remarkable is not that he did this, but that he was only slightly unusual in terms of his financial success.
In her book The Bourgeois Dignity, Deirdre McCloskey argued, rather controversially, that all movement, no matter how organic, comes top down in terms of the social pecking order. In the case of capitalism, the movement occurred, in part, because the group whom Goldberg termed “Second Sons” and McCloskey “bourgeois” had a particular knack for both recognizing and creating markets, even in very negative situations. The resilience evinced in the story of the castrati and their role in the history of music is a type of proof that McCloskey’s thesis is correct.
[1]In fairness to the elder Broschi, he was a well-regarded musician in his own right and had a strong career up until he inherited the estate and, following convention, retired to it to become a penniless landed gentleman, rather than a wealthy performer, like his younger brother. The suspicion is that Farinelli covered most of his brother’s family’s living expenses; it is known that he paid for the education of his nephews and niece.
Nightcap
- The elusive Byzantine Empire Dionysios Stathakopoulos, History Today
- Dragged Across Concrete – a review David Hughes, Quillette
- An archive of atrocities Mark Mazower, New York Review of Books
- A conservative foreign policy Jared Morgan McKinney, Modern Age
Three Lessons on Institutions and Incentives (Part 4): Institutions and the Rule of Law
Daron Acemoglu & James Robinson call the set of regulations that obstruct innovation “extractive institutions.” Of course, here again, extractive institutions are less harmful than the total absence of institutions. Not every change in the status quo can be interpreted as “creative destruction” or “entrepreneurship.” As Friedrich Hayek pointed out in Law, Legislation and Freedom, so that the most mutually compatible plans can be carried out, it is necessary that a well-defined set of expectations be systematically frustrated: the usurpations, the frauds, collusions, the paramilitary bands, etc., etc. The main thing is to have institutions that guarantee a minimum of order. Now, many times the institutions manage to be put into effect as a result of having the consensus of a certain number of interests that see in the law an opportunity to extract benefits. It is the distinction between Acemoglu & Robinson between the already mentioned “extractive institutions” and “inclusive institutions.” The latter are constituted by that set of rules that formally are equal for all and that materially protect private property, the value of money, competition understood as freedom of entry to markets, among other values of modern capitalism.
The distinction between extractive and inclusive institutions can find its parallelism in the expressions of “Rule by Law” and “Rule of Law.” The first consists on the accommodation of general and abstract normative statements with a second intention: to benefit a group at the expense of society as a whole. It is common to hear the criticism that the law has a false neutrality and that therefore any defense of the “Rule of Law” must be ideological (in the Marxist sense of the term). However, what distinguishes the concept of “Rule of Law” from “Rule by Law” is that, for the first of the terms, the consequences are unlikely to be predicted in terms of their particular and even more individual, while the second has an intentionality, declared or hidden.
To give an example, the procedural due process has such a degree of abstraction that it can hardly be predicted who will benefit from those proceedings. However, a law that prohibits the importation of a product of domestic manufacture clearly aims to redistribute resources from consumers to the local producers (although this type of regulation usually also generates consequences that are very difficult to foresee and often contrary to its original intentional).
Critics of the Rule of Law state that it is not neutral, because it protects exclusively the interests of the proprietors. However, such criticism loses sight of the fact that in the Modernity, any inhabitant, even those who are not citizens, can have access to the right to property, regardless of whether or not they belong to a certain caste, class, or social class. This, unlike the legal and political systems of the so-called Ancien Régime, which limited access to private property in perpetuity and irrevocably to a certain group of people, or even more, to a certain clan or group of families. It does not matter if, in Modernity, a person does not own any particular good, as long as he can count on the expectation of being able to become one at some time. In this sense, private property understood in the modern sense as that right that any inhabitant can enjoy from having stability in their possessions to the point of only being stripped of it by their own consent or by following the procedural due process.
This unlike laws protecting infant industries, professions or trades, or promotion of certain activities that are deemed as socially necessary or valuable, which establish a regime of transfers of resources from one sector of society to another. As the School of Public Choice indicates, such laws encourage “lobbying” and reduce the efficiency in the allocation of resources. In such institutional arrangements, individuals and businesses do not prosper through the discipline of serving the consumer, but through political agreements. Economic agents continue to maximize, but at the expense of regulations that deliberately establish certain winners (the owners of protected activities) and certain losers (consumers and potential producers who are denied access to protected activities). Under these circumstances, the citizenry begins to perceive an arbitrary sense in the norms and have no moral issues with challenging them (any contraband, without commercial purposes, is a clear example of this). Obviously, when non-compliance with standards becomes so extensive, regulations become ineffective. Moreover, as James M. Buchanan put it in his brief essay “A policy in the interests of producers,” the stagnation generated by protectionism means that the winners of such a system – the protected producers – turn out to be less rich than they would be in an open and competitive institutional framework.
Sometimes protectionism seeks its foundation in a mistaken theory of “original accumulation.” (Joseph Schumpeter ruled out the validity of such proposals by pointing out that, although those could have had some basis until the 19th century, the development of capital markets made this theory completely obsolete.)
However, neither Douglass North, nor William Easterly, nor Acemoglu & Robinson, deal with the problem of original accumulation. They prefer to encompass such phenomena within the set of erroneous theories that serve to justify policies arising from political agreements in polarized societies. This means that a certain institutional arrangement, an economic growth policy, a stabilization program, a constitutional reform, foreign policy and so on, in a polarized society is not inspired by abstract and formal principles but in concrete goals that benefit certain sectors of society above others.
The examples of polarized societies, to which Easterly and Acemoglu & Robinson turn, come mostly from African countries since these are mostly created in the process of decolonization and comprise different ethnic groups and languages within themselves, so polarization is much more evident: certain policies benefit a certain ethnic group over another. Easterly specifically cites the case of an African nation in which an ethnic group that represents 10% of the population lives in the region where a certain commodity is produced and whose export generates large revenues and, in the meantime, the government is elected, with some exceptions, by 90% of the remaining population, which imposes export rights on the said commodity, whose collection is destined to industrialization plans that systematically fail.
It is often tempting to explain the failure of such industrialization plans for the corruption evidenced in their execution. In fact, corruption cases are verified, but public policy would also fail even if those involved were incorruptible. Many times bad policies destroy much more wealth than political corruption. Corruption implies a transfer of resources and, therefore, an inefficient allocation of resources, while bad public policies result in the destruction of wealth.
However, examples of polarized societies in African countries can generate confusion around the main message of The Elusive Quest for Growth and Why Nations Fail. The economic performance of nations has nothing to do with geography, culture, or lack of preparation of the ruling elites to draw the plans of government. Easterly holds the main responsibility for the rise and fall of nations in incentives, while Acemoglu & Robinson point to the institutions that establish such incentive schemes. Regarding the opinion of Douglass C. North, although his line of research can lend itself to a “culturalist” interpretation, he himself recognizes the disruptive change of formal institutions as a determining factor of economic performance.
In summary, the three works discussed here have as a common denominator the role of incentives as a determinant of the economic performance of countries, above culture (which North would call “informal institutions”), geography, or the level of education of its elites. However, the case of polarized societies is presented as a critical point of such approaches.
José Luis de Imaz in Los que mandan (The ones who command) had defined politics as the activity consisting of articulating diverse interests according to a coherent plan of government. The definition of Imaz deserves to be put back into use, since it addresses the problem of polarization and also because its double edge allows to tie the loose ends left by the visions that we can group, with greater or lesser precision, under the “neo- institutionalist” (clearly the case of North, although it would be pending to discuss the label for Easterly and Acemoglu & Robinson).
Notwithstanding, that polarization is manifest in tribal or caste societies does not mean that it is not present in other societal forms. In the United States, the north and south; in Europe, the separatist movements; in Argentina, the interior and Buenos Aires. With greater or lesser intensity, manifestly or latently, politics is always structured on a space of tension of interests in competition for resources. Those who frequent the work of Carl Schmitt often claim that trade and law are “civilized” means for the exchange and dispute of such resources, politics and war are on the other side of the same question in terms of intensity of the conflict.
However, the term institutions – which define incentives – does not refer only to deliberate political agreements in pursuit of a specific purpose, such as a given public policy. The concept of institution also concerns a series of abstract and general principles whose final result at a particular level no one can foresee, because their level of abstraction imposes an insurmountable limit for the knowledge of its concrete consequences.
[Editor’s note: Here is Part 3; Here is the entire, Longform Essay]
Nightcap
- Why Hannah Arendt is the philosopher for now Lyndsey Stonebridge, New Statesman
- Does IR really have a “culture problem?” Peter Henne, Duck of Minerva
- The Kosovo War in retrospect Goldgeier & Grgic, War on the Rocks
- The final treasure from the Tolkien hoard? Nick Owchar, Los Angeles Review of Books
Relicts of the past? The current challenges for diplomacy
The last few weeks were quite a blast for me: I’ve interned at the German embassy in Rome. A new job in a new city. I thought to process the experiences I made here in one (or a few?) articles.
It’s been quite a rough month for Germany’s Foreign Affairs department. First, Daniel Kriener, the German ambassador in Venezuela, was forced to leave the country after welcoming Interim President Guiadó at the airport of Caracas. Interestingly, although plenty of other diplomats joined him, he was the only one to be declared a “persona non grata” for interfering in Venezuela’s internal affairs. A few weeks later, a deputy speaker of the German Bundestag (who is also a member of the liberal party) demands to expel the US ambassador Grenell for the same offence. Prior, the US diplomat has criticized Germany’s plan to break their promise of contributing more to NATO’s defence budget. Albeit I politically agree with both actions of the diplomats in these cases, they delineate the ongoing structural changes in the diplomacy sector. To illustrate this, I will first provide a theoretical framework to analyze ongoing diplomatic challenges before trying to examine the role of diplomacy in the future.
Principal-Agent Theory and decreasing relevance
I conceive diplomacy as mostly a principal-agent based problem. I believe that many problems in diplomatic negotiations can be traced back to the classic effects of asymmetric information. Since two principals, in this case two states, cannot negotiate with each other directly in most cases, these arbitrations are carried out between various agents. Those agents are of course not always the ambassadors. In a broad meaning, one can apply the principal-agent paradigm to diplomacy by every negotiating process initiated by the state.
Through the lens of the principal-agent paradigm, I perceive the main task of diplomacy to achieve a good negotiating position, for example through an informational advantage. However, due to globalization, state-to-state diplomacy has been drastically weakened. The negotiating game is now mostly carried out within other institutions with lower transactions costs. Two countries want a new trade deal? Just orientate on WTO Rules. Sue another country? Call the International Criminal Court. A few voices made reasonable arguments even for abolishing unnecessary embassies and only keeping the crucial ones. The Trump administration, for example, seems not eagerly committed to fill the around 18 vacant ambassador positions hastily.
Certainly, the globalization combined with the expansion of robust institutions leaves little space for traditional diplomacy as a driving force in interstate relations. This is not necessarily a bad development: As Paul W. Meerts points out, this can be a huge chance for weaker states since negotiating in multilateral rather than bilateral constellations tends to weaken the position of stronger states. Thus, playing out the trump cards in negotiations will be harder for the hegemon. We can currently witness this in the Brexit debate: Even though the strong states, Germany and France, have a vast repertoire of power resources to use as leverage against GB in the negotiations, the can hardly deploy them through EU’s multipolar negotiating structure.
Contrary, there are also recent examples of deploying bilateral traditional diplomacy measures successfully. China’s initiation of Italy’s accession to the Belt Road Initiative (see Tridivesh Singh Maini’s great article here for a quick overview) is a prime example for this. But no other case shows the weaknesses of bilateral diplomacy in a more drastic way: China was able to transpose their tremendous power resources into a deal which heavily favours the Chinese economy. The very ambiguous agreement laid down a strategy of “closer economic collaboration.” The oppositional criticism of the deal coming from the very left and the right is based on economic nationalism and thus misses the important point. Chinese government exerts immense influence on key enterprises like Tencent, Alibaba, and Badoo: Digital fundamental research topics such as AI were distributed to the firms not through competition but through the state ( I highly recommend Amy Webb’s EconTalk if you want to dig deeper into this.). Once they build sufficient digital infrastructure here in Europe, network effects and technological advantage will come into effect and engender high entry barriers and exit costs. This makes it easy for China to enforce its regulation rather than obeying European ones. Although it is hard to finally determine if multilateral negotiations would have secured a politically better deal, I favour higher short-term transaction cost of multilateral negotiations over the long-term threat showed above.
Embassies as service provider
Of course, taking care of a good interstate negotiation position is not the only task of an embassy. A popular counterargument is that the principal-agent perspective neglects the vital daily business of embassies to help their citizens abroad. Speaking of large and prestigious Embassies though, I estimate that their role as service provider for abroad living citizens will further decline. Most of their maintenance work for citizens living abroad will be redundant due to technological process and further institutionalization. Renewing a Passport, issuing visas and transporting back coffins (yep) are a frequent task, but easy to “source out” to private actors in the future.
But what is the role for ambassadors and embassies then?
This question is where it gets interesting in my opinion. Deeply rooted in international conventions and international customary law, discreet and silent work has been prerequisite for an ambassador. Carefully collecting small pieces of information and building bridges to local actors were the key for a good negotiating position. But as elaborated above, international institutions do the job more efficiently. A new role of ambassadors as advocates for concrete policy measures would be diametrically opposed to international conventions. Based upon the “legality creates legitimacy” premises, a further politicization of diplomacy seems not at present having a majority and thus is unlikely to be buttressed by legal means.
However, if we fall back into a narrative of nationalism, bilateral diplomacy will regain relevance. Otherwise, it will continue to slowly lose importance and eventually wane. Hence, the main challenge nowadays is to look for the right niche for traditional diplomacy – and it seems that it has not been found yet.
Three Lessons on Institutions and Incentives (Part 3): Innovation means creative destruction
The concept of creative destruction was popularised by Joseph Schumpeter and assumes that the economy is in a equilibrium. The “entrepreneur,” therefore, is an unbalancing factor that, through innovation, displaces the winners of the prevailing situation until then, generating a new equilibrium. This notion was criticized by other economists such as Friedrich Hayek and Israel Kirzner, who saw that the entrepreneur, far from being a disequilibrating factor, obtained its benefits by identifying the points of disequilibrium of a system and arbitrating between them.
The concept of “creative destruction,” on the other hand, focuses on businesses that go to waste from the irruption of the entrepreneur. This emphasis allows us to understand why there will be those who see with fear or disgust the very idea of innovation. In contrast, Hayek and Kirzner emphasize the benefits of the new equilibrium: greater efficiency in the allocation of resources and, consequently, a greater generation of wealth. The notion of Schumpeter allows us to explain why many oppose innovation, that of Hayek and Kirzner gives us reasons to move forward with it. Strictly speaking, in order for innovation not to cause damage at the aggregate level, it must satisfy the Kaldor-Hicks criterion, that is, the gains from innovation must be so high as to allow a hypothetical compensation to the ones who lost the new distribution of resources.
In short, the notion of creative destruction that both William Easterly and Acemoglu & Robinson use, although it might differs from Schumpeter’s, meets the said Kaldor-Hicks criterion. In these cases, innovation does not represent a social disvalue, but on the contrary it generates a benefit for the whole. Therefore, it goes without saying that any brake on an innovation of this nature generates social loss. At this point, if innovation -also called “creative destruction”- is systematically curtailed, in order to seek to protect activities that would otherwise be displaced, society may encounter the following scenarios: a relative delay (regarding its potential) of its development, or a stagnation, or setback. In all three scenarios, inequality in wealth and income increases, or society sees its standard of living delayed or diminished in a homogenous way. In this last case, the protected sectors are also harmed by the brakes imposed on innovation.
[Editor’s note: Here is Part 2; Here is the entire Longform Essay.]
Nightcap
- Brexit and the battle for sovereignty Alex Massie, CapX
- Japanese media and its foreigners Elanor Sezer, Japan Times
- The most original novelist in America Laura Miller, Slate
- The Englishman who saved Japan’s cherry blossoms Claire Hazelton, Spectator
Three Lessons on Institutions and Incentives (Part 2); Institutions: definition and subtypes
Implicitly, Douglass C. North, William Easterly, and Daron Acemoglu & James A. Robinson share the same notion of “institution.” In this respect, what must be taken into account is not a real definition of the former but its operative concept, that is, what characteristic features relate it to the rest of the concepts of each theoretical body. In this sense, we can affirm that for these authors an institution is a limiting factor for human interaction. More precisely, in terms of D.C. North, institutions can be defined as abstract constraints imposed on human social decisions that structure political, economic, and social interaction. The rational agent finds limited its action and its spectrum of choices by institutions, which can be derived as much from the law as from custom, his habits, or his moral constraints.
However, the particular limitations that a particular person experiences are not relevant, but those that are incorporated into the behavior of a large number of human beings that interact with each other, which allows them to recognize a structural pattern of human social action. In this way, although an institution limits human action, because it is widespread throughout the social fabric, building it, it allows each individual inserted in such a set of interactions to represent expectations about the behavior of their fellow human beings that have a high probability of being true (something similar to what Friedrich A. Hayek had previously enunciated in his concept of “spontaneous order”). These expectations allow each individual to make plans with a high degree of probability of accomplishment, or at least to identify those actions that could be ruinous. In this sense, an institution is not only a limitation of human action, but, correlatively, a motivator for it, i. e. an incentive. The structure of human interactions that institutions project in the political, economic, and social fields helps the rational agent to make more efficient decisions, since they have a lower margin of risk. Of course, not all the incentives generate the same economic performance.
It is true that any pattern of human interactions that constrains the scope of choices of the agent (i.e., institutions), however inefficient they might be, represent an advantage over the total absence of it, since it works as a hedge against the arbitrary power and violence from third parties. Thus, the main distinction to be drawn is between anomie and institutionalization.
This latter opinion is expressly stated in Why Nations Fail: the extractive institutions -the ones that establish rules that favor a group at the expense of the whole-, both politically and economically, although they are harmful, are less so than civil war, polarization, factions, or anarchy. Acemoglu & Robinson argue that a country that does not have “inclusive” institutions, but at least have extractive institutions, might experience a rapid development obtained from the importation of discoveries from better organized countries – the phenomenon of “catch up.” However, after reaching a certain maturity, if the country in question does not advance towards political and economic opening, stagnation and subsequent implosion will be difficult to avoid.
Here is where the book of Acemoglu & Robinson finds its point of greatest affinity with the work of William Easterly: to continue on a path of growth and development, countries and their ruling classes must be willing to admit that progress only comes through innovation and that all innovation is accompanied by a process of “creative destruction.”
[Editor’s note: You can find Part 1 here. You can find the entire Longform Essay here.]
Notes On Liberty 