Nightcap

  1. The trend of economic thinking F.A. Hayek, Economica
  2. Against moderate politics Jason Sorens, Cato Unbound
  3. Socialist fantasies Sarah Skwire, EconLog
  4. “From the ashes, modernity arose, but at a cost” Thomas Lecaque, Age of Revolutions

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.]

Nightcap

  1. A review of Naipaul’s The Enigma of Arrival Jeffrey Folks, Modern Age
  2. Christians in Egypt are under attack…again Farid Farid, the Atlantic
  3. Mormons fight to be called by their full name Bruce Clark, Erasmus
  4. A Kazakh scam (post-socialism) Robert Drury, London Review of Books

Rule of Law: the case of open texture of language and complexity

This article by Matt McManus (@MattPolProff) recently published at Quillette made me remember H.L.A. Hart’s theory of law and the problems derived from the open texture of language, a concept borrowed by him from Friedrich Waismann, an Austrian Mathematician and philosopher of the Vienna Circle. Many authors would rather distinguish “open texture” from vagueness: being the latter a proper linguistic matter, the former is related to the dynamic of the experience. As Kyle Wallace summarized the problem: “certain expressions are open textured simply because there is always the possibility that in some new experience we may be uncertain whether or not the new expression is applicable.”

However, Brian Bix, in his “H.L.A. Hart and the ‘open texture’ of language,” argues that, despite the concept of “open texture” being a loan from Waismann’s philosophy, the use gave to the term by Hart is not derogatory at all. With respect to Hart’s point of view, the “open texture” of the law is rather an advantage, since it endows the judges with a discretionary power to adjust the text of the law to the changing experience.

Concerning individual liberty, the laudatory qualification of the open texture of the law made by Hart and Bix might be shared by the jurists of the Common Law tradition, but it hardly would be accepted by anyone from the Civil Law System. According to the former, every discretionary power enabled to the judges helps to prevent the political power from menacing individual liberties, while, following the latter, the written word of the law, passed by a legislative assembly according to constitutional proceedings, is the main guarantee of individual rights.

But the subject of the open texture of the language of the law acquires a new dimension when it is related to the coordination problem derived from the limits to knowledge in society. As it was distinguished by F. A. Hayek in the last chapter of Sensory Order, we could talk about two types of limits to knowledge: the relative and the absolute. The relative limit to knowledge depends upon the sharpness of our instruments used to gather information, whereas the absolute limit to knowledge is sealed by the increasing degrees of abstraction that constitute every classification system. Since every new experience demands the rearrangement of the current system of classification we use to order our perception of reality, the description of this feedback process requires a supplementary system of classification of a higher level of complexity. The progress of the subject of knowledge into higher levels of abstraction reaches an unconquerable limit when he is tasked with the full study of himself.

Thus, we could ascertain that the judiciary function would be enough to fulfill the problems that could arise from the open texture of law, since the judge pronounces the content of the law not in general terms, but in concrete definitions in order to solve a case. In this labour, the judge not only applies the positive law, but he might “discover” abstract principles that become relevant in order to the given new experiences that begot the controversy over the content of the law he is due to solve. This function of “immanent critique” of the positive law by the judiciary system is well discussed by F. A. Hayek in the fifth chapter of his Law, Legislation and Liberty. Since the judiciary function solves in every concrete case the coordination problem derived from the fragmentation of knowledge in society, the open texture of the law does not make it opaque to the citizens.

That notwithstanding, the open texture of the law remains as a systemic limit to the legislative assemblies to define the whole content of the law. Thus, since the whole content of the law can only be achieved in a given concrete case by a judge solving a particular controversy, every central planner would have to accomplish his model of society not through decisions based on principles, but on expediency. Central planning and rule of law will be always set to collide. In this sense, the concept of open texture of the law might work as a powerful argument for the impossibility of every central planning to be performed, sooner or later, under the rule of law.

Paul Romer, the World Bank and Angus Deaton’s critique of effective altruism

220px-Paul_Romer_in_2005

Last week Paul Romer crashed out of his position as Chief Economist at the World Bank. He had already been isolated from the rest of the World Bank’s researchers for criticizing the reliability of their data. It seems there were several bones of contention, including the accusation that Chile’s current social democratic government falsified data contributing to some of its development indicators. Romer’s allergic reaction to the World Bank’s internal research processes has wider implications for how we think about policy research in international NGOs.

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Freedom of Conscience and the Rule of Law

Of course the concept of “freedom of conscience” was forged in Europe by Spinoza, Locke, Voltaire, John Stuart Mill, and many other philosophers. But the freedom of conscience as an individual right that belongs to set of characteristics which defines the rule of law is an American innovation, which later spread to Latin America and to the Old Continent.

This reflection comes from the dispute which has been aroused in Notes On Liberty about the Protestant Reformation and freedom of conscience. Now, my intention is not to mediate between Mark and Bruno, but to bring to the Consortium a new line of debate. What I would like to polemize is what defines which rights to be protected by the rule of law. In this sense, might we regard a political regime that bans freedom of conscience as based on the rule of law? I am sure that no one would dare to do so. But, instead, would anyone dare to state that unification of language in a given country hurts the rule of law? I am afraid that almost nobody would.

Nevertheless, this is a polemical question. For example, the current Catalan independence movement has the language of Catalan as one of its main claims, so tracing the genealogy of the rights that constitutes the concept of rule of law is a meaningful task —and this is why the controversy over the Protestant Reformation and the origin of Freedom of Conscience at NOL is so interesting.

Before the Protestant Reformation, the theological, philosophical, scientific, and political language of Europe was unified in Latin. On the other hand, the languages used by the common people were utterly fragmented. A multiplicity of dialects were spoken all over Europe. The Catholic Kings of Spain, for example, unified their kingdom under the same religion, but they did not touch the local dialects. A very similar situation might be found in the rest of Europe: kingdoms with one religion and several dialects.

There was a strong reason for this to be so. Before the Medieval Ages Bibles in vernacular had existed, but the literacy rate was so low that the speed of evolution and fragmentation of the dialects left those translations obsolete and incomprehensible. Since printing books was extremely costly (this was before the invention of  the printing press), the best language to write and print books and constitutional documents was Latin.

The Evangelical movement, emerged out of the Protestant Reformation, meant that final authority of religion was not the Papacy any more but the biblical text. What changed was the coordination problem. Formerly, the reference was the local bishop, who was linked to the Bishop of Rome. (Although with the Counter-Reformation, in some cases, like Spain, the bishops were appointed by the king, a privilege obtained in exchange for remaining loyal to the Pope). On the other hand, in the Reformation countries, the text of the Bible as final authority on theological matters demanded the full command of an ability not so extended until that moment: literacy.

It is well-known that the Protestant Reformation and the invention of printing expanded the translations of the Bible into the vernacular. But always goes completely unnoticed that by that time the concept of a national language hardly existed. In the Reformist countries the consolidation of a national language was determined by the particular vernacular which was chosen to translate the Bible into.

Evidently, the extension of a common language among the subjects of a given kingdom had reported great benefits to its governance, since the tendency was followed by the monarchies of France and Spain. The former extended the Parisian French over the local patois and, in Spain of the XVIII Century, the Bourbon Reforms imposed Castilian as the national Spanish language. The absolute kings, who each of them had inherited a territory unified by a single religion, sowed the seeds of national states aggregated by a common language. Moreover, Catholicism became more dependent on absolute kings than on Rome —and that is why Bruno finds some Catholics arguing for the separation of Church from the state.

Meanwhile, in the New World, the Thirteen Colonies were receiving the European immigration mostly motivated on the lack of religious tolerance in their respected countries of origin. The immigrants arrived carrying with them all kind of variances of Christian confessions and developed new and unexpected ones. All those religions and sects had a common reference: the King James Bible.

My thesis is that it was the substitution of religion for language as the factor of cohesion and mechanism of social control that made possible the development of the freedom of conscience. The political power left what was inside of the mind of their subjects a more economical device: language. Think what you wish, believe what you wish, read what you wish, write what you wish, say what you wish, as long as I understand what you do and you can understand what I mean.

Moreover, an official language became a tool of accountability and a means of knowing the rights and duties of an individual before the state. The Magna Carta (1215) was written in Medieval Latin while the Virginia Declaration of Rights (1776), in English. Both documents were written in the language that was regarded as proper in their respective time. Nevertheless, the language which is more convenient to the individual for the defense of his liberties is quite obvious.

Often, the disputes over the genealogy of rights and institutions go around two poles: ideas and matter. I think it is high time to go along the common edge of both of them: the unintended consequences, the “rural nomos,” the complex phenomena. In this sense, but only in this sense, tracing the genealogy – or, better, the “nomology” – of the freedom of conscience as an intended trait of the concept of “rule of law” is worth our efforts.

BC’s weekend reads

  1. Turkey and the Case of the Magical Vanishing Coup
  2. Is the overthrow of a democratically elected government ever justified?
  3. John and Abigail Adams educated their son, John Quincy, to become the worthy successor of the Founding generation of the new regime
  4. An American economist’s observations from Europe
  5. The Influence of Culture on Science, and the Culture of Science
  6. Confessions of an Ex-Prosecutor

PS: Did anyone else notice that the Brexit vote was 51%-49%? I mean, there’s a lot to think about there, especially for libertarians who claim that democracy sucks but Brexit/Nexit/Grexit is totally and completely justified if the people demand it…