Institutions, Machines, and Complex Orders (Part 8): Inequality before the law, de facto

06/24/201906/16/2019 Federico Sosa Valle Culture, Law complex orders, coordination problem, F.A. Hayek, François Furet, ideology, incentives, inequality, institutions, Kenneth Minogue, public policy, rationalization, spontaneous order

François Furet, in the preliminary essay that serves as an introduction to The Past of an Illusion, entitled “The Equalitarian Passion,” highlights that in the Ancient Regime inequality was legally consecrated, while after the French Revolution, inequality persists surreptitiously, of contraband, thus cementing a feeling of vindication in the face of illegitimate inequality. Something similar happens in a system of regulations that, with the intention of serving the common good, re-establishes, de facto, a system of monopolies and oligopolies.

It is paradoxical that a political legal system made up mostly of general and abstract rules finds an unintended consequence of an increase in general well-being, while a regimented system based on a specific goal of social justice and growth finds itself as an involuntary stagnant consequence and with high rates of inequality. However, attentive given that no one can be judged morally for their involuntary results and instead for their intentions, it is commonly interpreted that the success of societies organized around abstract and general principles cannot be adjudicated to such principles, as it is also considered active policies that deliberately seek the common good cannot be reviewed by virtue of their poor results, but in any case what deserves to be discussed are the means to reach such objectives.

Once this point is reached, we discard any political program that does not have a purpose of reform or transformation based on a specific objective and in which the political discussion is about society models and the means to achieve in the practice of the realization of such models, the table is served for the ideologization of political discourse. Kenneth Minogue had rescued the original concept of “ideology” -before the Marxist who points to a set of values of the ruling class at the service of the perpetuation of his power-, which dealt with the set of claims with scientific pretension that, through a redemptorist program, he proposed a series of concrete transformations of society. This word and notion comes from the ideologues of the French Revolution, which mostly fulfilled a pedagogical function.

Since the ideology of politics is installed, any doctrine that arises from its discourse in terms of defending a system of coexistence articulated around abstract and general norms and lacking a specific purpose of designing the society according to a certain model. In the political arena, therefore, there are political programs that seek to impose a certain model of society, articulated around a series of assertions with alleged scientific validity. Whatever the model of society under discussion, by the mere fact of proposing such political programs the transformation of society in function of those, the legal norms expressed in abstract and general terms that make up both the individual guarantees and the private right run the serious risk of being considered as an obstacle and an irrational hindrance of the past that prevents the realization of such models of society. This is the process that Friedrich A. Hayek had described in The Road to Serfdom.

The paradox is that a legal – political system composed mostly of abstract (that is, lacking a concrete purpose) and general (that is, the same for all citizens regardless of their status) rules allows to coordinate in a more efficient way the resources of those that a society has, through a better coordination of individual plans, about whose content we know nothing and whose final configuration is impossible to predict, that is, a complex social order. On the other hand, the abolition or gradual weakening of such a system of coordination in the allocation of resources and its replacement by a system of planning or centralized control of the economy and society based on a specific model generates an economic breakdown that only serves of excuse to redouble centralization in the administration of resources. At one point, neither the model of society nor the need to have a central planning to reach it, nor even that there is such a model or such a central planning of society, is only discussed, but it is indeed discussed which are the most appropriate means to “improve” said model.

That said, it is worth making a terminological clarification: what Hayek called in The Road to Serfdom “socialism” and then in Law, Legislation and Liberty “constructivism,” can be assimilated to a large extent to what Kenneth Minogue called “ideology” (although in truth, it must be recognized that Minogue, at the time, accused Hayek of being an ideological author). But, as Hayek himself clarifies in his prologue to the 1974 edition of The Road to Serfdom, the socialism to which he alluded in 1944 was not income redistribution programs, but the centralized planning of the economy and society . Similarly, Hayek’s critique of the notion of social justice concerns precisely those programs of political reform that seek to establish, through centralized planning, a designed social order. Another issue is the positivization of values through abstract and general rules. A negative income tax – as proposed by Milton Friedman at the time – can be implemented through abstract and general norms, as well as patterns of redistribution inspired by John Rawls’ theory of justice. The problem is not redistribution, but the replacement of a spontaneous social organization system with a centralized planning system.

At the heart of the dispute between the prevalence of a spontaneous social order versus its replacement by a system of centralized planning of society is a divergence around the concept of the abstract. The supporters of the centralized planning of society are convinced that, through the measuring elements provided by science, the wealth of social events can be selected in aggregates that allow forming an abstract model of society, which In turn, it allows planning its reform according to the ideal model of society in whose transformation the political program that gives it reason to be to the politician’s own activity and that justifies his ethics of responsibility.

Of course, statistical tools, which are constantly developing (Hayek himself was a professor of statistics, and from The Road to Serfdom to today appeared the desktop computer and the science of Big Data, for example), allow a better allocation of public resources in the implementation of government programs. It is very useful for the rationalization of the government administration to know how much the population is going to vaccinate, the poverty and indigence statistics in order to determine, for example, subsidies to the demand, or the needs of schooling at its various levels. However, if there is consensus on the need for a vaccination program, or on the importance of subsidizing access to certain goods or the importance of schooling the population, it is because the members of that society already have a set of principles about what is considered good or bad, desirable or undesirable, necessary or superfluous. Such abstract notions do not arise from the abstraction of social events in statistical aggregates, but, on the contrary, these abstract concepts allow to form the groupings by virtue of which the social reality will have to be interpreted.

Such principles are born, develop and evolve according to the game of continuous human interaction. As described above, they consist of uses and customs that individuals incorporate in the course of exchanges and that prove with the passage of time to provide a better performance to the members of the community that follow them. Accounting standards, public behaviour guidelines, compliance with the word pledged, good faith, are examples of such practices that are extended throughout the population by incorporating such standards into the habits of its members. It was what Max Weber at the time conceptualized as the emergence of “rational capitalism.” These principles are not immutable, but on the contrary they adapt to the circumstances. However, they also enjoy certain permanence in time that allows them to serve as a structure or parameter for rational decision-making, since such a structure of values prohibits a certain range of decisions, which makes its transitivity possible.

This system of discovery and spontaneous evolution of the abstract values according to which reality is perceived and its respective organized elements can assume various configurations and has its own process of immanent criticism. The egalitarian guidelines that we can characterize as typical of modern society, in which every human being has the right to have equal consideration and respect, were extended over less efficient structures such as those of the caste and estates societies, in which the restrictions of competition and the unpredictable exercise of political authority generate stagnation (what Acemoglu and Robinson call “extractive economic and political institutions,” as opposed to “inclusive”). For its part, the peaceful resolution of disputes through the right of judges allows readjusting the set of expectations with which each member of society usually makes its decisions.

Such a system of discovery of abstract values with which each individual can count on to coordinate their respective life plans and their corresponding immanent criticism through the judicial system is also susceptible of receiving a critical analysis by a reasoned examination regarding it and as a result of this, a new political legal order or partial reform of the existing one may arise through the legislative promulgation or even of a constituent assembly. A spontaneous order may have as its origin the enactment ex nihilo of it by a legislator, but among its defining characteristics is the note that it should not necessarily be so. Another of its defining characteristics is that the consequences of a political legal order, still created by the will of a legislator or constituent, cannot be foreseen in its entirety. Moreover, the future evolution of this order cannot be foreseen in its totality and detail. Such degree of uncertainty does not come from the deficiency or insufficiency of the elements of measurement that have for object to know the reality, but in the levels of complexity to which such order can arrive in their more abstract planes.

However, these degrees of complexity decrease drastically in the daily experience of the subjects that interact with each other, seeking to coordinate or compete in their respective individual plans, since each one of them knows what expectations to have regarding the actions of the rest of the subjects (the more “inclusive” the institutions are, the lower the degree of uncertainty). For the case in which two spheres of autonomy collide, the controversy will be resolved by a court that will have to say the content of the law for the specific case submitted to its decision. From this result, they will have to configure a set of expectations with which agents will know that they can count or not.

In contrast to this, at the level of the legislator and the political authority, such levels of certainty leave room for increasing degrees of complexity. Although there are many administrative decisions that can be taken with a high degree of probability of being successful following the procedures of administrative law and the general principles of law – what Max Weber described as a process of rationalization in political decision-making , the certain thing is that it arrives at a point in which the legal reasoning arrives at a limit – what in his moment Carl Schmitt characterized like an instance in which the right dies and leaves its place to the policy. This is where the political authority is faced with the need to dispense with the rationalizing element of law and articulate its decision-making process based on another type of “anchoring”: a philosophical doctrine, a conception of life, a political doctrine, a reason of state or an ideology.

Those who oppose the extension of political power over the autonomous institutions and processes of society maintain that such philosophies, reasons of state, or ideologies are mere masks of pure political will left to their free will. However, at least in principle, they can serve as limitations or at least elements of political responsibility of the ruler in a democracy. There are numerous cases in which a democratically elected governor receives criticism from public opinion regarding a supposed lack of consequence with his political doctrine, a double discourse, or the configuration of a consistent but mistaken ideology. Even so, except for the cases of impeachment and the impossibility of re-election, the tools to control the political reasons of the rulers and their consequences are rather scarce.

However, a distinction can be made between a simple political doctrine and an ideologized political doctrine – or, in Minogue’s terms, quite simply an ideology. A political doctrine can sustain a series of diffuse principles that do not exhaust a totalizing vision of reality. For example, German Christian Democracy can be defined equally by rejection of the extreme left, as the extreme right, a market freedom regulated by the State in order to preserve competition from the actions of monopolies (the “competitive order” of Ordo-Liberalism) and the moderate defence of certain values prevalent in society through the non-interference of the government in its autonomous processes, that is, a clear division between society and State. However, no one can define in detail an ideology of German Christian Democracy.

In many circumstances, this “de-ideologization” is interpreted as “pragmatism” or “opportunism.” However, there is also room for opportunism in the interpretation of a political ideology by the public power that invokes it as a reason of state. The great problem that “ideologies” or ideological visions of politics do present is that, by offering a totalizing and scientific version of reality, they can be used as tools to discredit the legal system.

It is true that a legal system could be replaced by another in its entirety through a legislative reform – in the case of private law, a new civil code, for example – or a constitutional reform. But once reformed or replaced by the new, unless a tyranny has been instituted, it becomes the new legal order that will limit the political power. The problem arises when there is a phenomenon that can be named as the “road to serfdom”: the continuous, permanent and incremental discrediting, erosion, violation and exception to the current legal order.

When such a process is presented, freedom understood as the absence of arbitrary coercion is in decline, since, by invoking a reason of state or a state of exception, the expectations with which individuals counted to form their plans of life are frustrated in a way impossible to foresee. As a result, the political legal order becomes perceived as arbitrary and its obligation to obey it put in doubt.

Another consequence of the phenomenon known as the “road to serfdom” is that the system of immanent criticism of positive law affected by the application of this by judges in the face of concrete controversies is eroded. As already mentioned, attentive to the open texture of legal language, the judicial system allows for marginal readjustments on the content of the law that represent a true process of evolution, in the sense of adaptation to changes in the environment. In turn, this readjustment introduces new expectations in the agents, which generates a change in reality and opens the way for a new interpretation change through the open texture of the letter of the law, in a real feedback process negative that gives stability and predictability to the system.

On the contrary, the state of emergency and emergency legislation, as well as legislative and judicial activism, which seek to modify the content of the law not to solve the internal contradictions generated by its open texture, but to transform it according to concepts alien to the law. Right, they erode such a negative feedback system of expectations and, far from achieving the modernization of the law, what they obtain is their obsolescence, their discredit, and their disobedience. See that in countries with a greater authoritarian tradition, the adherence to standards by the population is significantly lower than in countries where emergency legislation and the state of emergency was limited to cases of war.

[Editor’s note: here is Part 7, and here is the essay in its entirety.]

Institutions, Machines, and Complex Orders (Part 7): The open texture of the words of the law

06/23/201906/16/2019 Federico Sosa Valle Culture, Law Carl Schmitt, complex orders, constitutionalism, F.A. Hayek, government regulation, incentives, institutions, isonomy, language, norms, public policy, rule of law

However, the law itself has its own endogenous system of production of rules, which operates on the abstract plane of the configuration of the structure of the relationships between its terms, and whose dynamics depends on the negative feedback process implied by the judicial work itself to clarify the words of the law for each specific case to be decided. Both in codified law systems and in customary law systems, the current positive law is clearly defined. The legal systems in which previous judgments oblige judges are even more rigid than codified systems, since in the latter it is enough for the legislature to enact a new code for the positive law to change. On the contrary, the judges must make a hermeneutical effort to modify the doctrine consecrated in a judicial precedent without this constituting an arbitrary ruling.

However, both in coded and customary legal systems, the law, which is always enunciated in express statements, carries with it the phenomenon of the open texture of language. These are not the cases of ambiguity, vagueness, or obscurity of the letter of the law. These latter cases can be solved by the doctrine, composed of scientific works that investigate the debates between the members of the legislative power at the moment of sanctioning the norm whose text carries such problems, or resorting to the normative antecedents of which the current law took its vocabulary.

However, vagueness, obscurity, and ambiguity in the words of the law configure linguistic problems with legal relevance, but not legal ones in themselves. What really matters to study are the cases of open texture of the language of the law, since it is through these cases that the law evolves.

In cases of open texture of language, the anomaly occurs in the universe of events to which the language refers. An obvious example: a constitution written in the 19th century can establish that the President is the Commander-in-Chief of land and sea forces. It would not be necessary to reform its text to incorporate the air force – or even weapons built to act outside Earth’s orbit.

However, the dynamics of legal traffic are mostly made up of less obvious cases in which the open texture of language forces judges to establish the words of the law for the specific case, resorting to a hermeneutic interpretation of the law for which “common sense” is not enough. In customary law these hard cases are those that generate a new precedent that often define what is inside and what is outside the “good legal sense.” The authors disagree among themselves on how to characterize this aspect of judicial work. However, the remarkable thing is that these “difficult cases” generated by the phenomenon of the open texture of the language are what make the law respond autonomously to changes in the conditions of the environment that the same right has as a regular task.

Indeed, Friedrich Hayek states in Law, Legislation and Liberty an attempt to separate law and politics based on the evolution of law according to a process of natural selection of norms. While it expressly recognizes that a legal system can be sanctioned in its entirety by the legislator, it also highlights the ability of legal systems to make an immanent critique of themselves, through the judicial system.

Although Hayek does not analyse the phenomenon of the open texture of language in his work, it does characterize law as a structure of norms that continually readjust to changes in circumstances following a negative feedback process, through successive judicial decisions. In Hayek’s own words, what establishes a legal order is a set of expectations about the behaviour of congeners that will be considered or not according to law. For example, if a party fails to meet its contractual obligations, it can expect the other party to refuse to comply with them and that, if sued, the latter will be supported by the courts. This expectation also works as an incentive to fulfil contracts and reduce litigation.

On the other hand, another feature of legal systems -particularly modern ones- that Hayek highlights is the definition of a range of expectations that will be systematically thwarted. This is what determines a structure for human action and implies the consecration of the principle of closure: everything that is not expressly prohibited is allowed. This allows individuals to form their life plans with the expectation that they will be fulfilled and with the ability to anticipate the behaviour of their peers, since they will be under the same incentive structure. The latter leads to a third characteristic of modern legal systems, which allows them to function as self-regulated systems: the principle of isonomy or of the same law for all. The incentive structure determined by the range of expectations that will be systematically frustrated, in a system that results from the same application for each individual, allows the definition of individual spheres of autonomy, within which each individual has free discretion, but when entering into collision with each other, each one will be able to infer what expectations they can have regarding a possible judicial ruling.

The reverse of this system is the “Administrative State,” by Carl Schmitt, in which only that which is expressly authorized by a decision based on expediency, and the status system of the Ancient Regime, is permitted, that each group had a private legal system or privilege-strictly speaking, our current modern system of rights consists in the extension to all human beings of the liberties or privileges that the nobles had wrested from the kings at the time. Therefore, it is a great risk that the number of regulations is such that the rule becomes that only what is specially expressly regulated can be done, depending on the dynamics of the change of the decision of the authority taken in administrative files, and that such is the segmentation of regulations according to pressure groups and interest groups, that they return to a system of privileges instead of equality before the law.

It is not difficult to find numerous current examples: the public transport system could reach levels of regulation such that it could practically be said that only such activity can be carried out with the express authorization of the public authority to that effect. The alternative is not the absence of regulation, on the contrary, the alternative is the modern State of Law: a set of positive norms, dictated by the competent authority and formulated in general terms. These rules that regulate public transport do not have an abstract content, but rather a concrete one: the set of objectives expressly set by public policy. While the rules of private law have an abstract content, that is, they lack a specific purpose, the rules of public law not only have a specific and specific purpose, but that such purpose must be expressly declared, in such a way that justice they can evaluate whether the willing means disposed by the public authority are related and proportional to the purpose of the rule of public law and, in turn, the citizens consider whether such ends are worth pursuing.

To continue with the exemplification of public transport of passengers and merchandise: there is a sphere that corresponds exclusively to private law. This refers to the rules that attribute legal responsibility between the transporter and the transported: the obligation of the transported to pay the ticket or the freight, the obligation of the transporter to transfer the people and goods without them suffering damages. In this sphere there is no concrete purpose of the norm. It only limits itself to stating the set of expectations that the parties can count on, regardless of who they are specifically and what the specific purpose of the transport is.

Correlatively, the regulation of public transport, which belongs to the orbit of public law, does have certain specific purposes. For example, take care of public safety and ensure an efficient distribution of the cost of accidents. For this purpose, it may provide that public transport companies register, periodically review the status of their units, which must meet certain minimum standards, and establish the obligation to contract civil liability insurance. Anyone who complies with these provisions, for example, could devote himself to the activity of public transport, passengers or merchandise. How many and who will be the transporters is something that the public transport regime should not compete with. The number of carriers will be fixed by the price system. Nevertheless, to the control of public transport must concern that the units that circulate are in good condition, that their drivers are suitable and have an insurance that covers their civil liability, so that the transported does not have to face the cost of accidents before an eventual bankruptcy of the carrier. On the other hand, the system of private law, in a parallel and autonomous way, distributes the responsibilities between the parties, without addressing who is each one.

[Editor’s note: Part 6 can be found here, and the full essay is here.]

Institutions, Machines, and Complex Orders (Part 6): Institutions as algorithms

06/22/201906/16/2019 Federico Sosa Valle Culture, Law complex orders, dispersed knowledge, institutions, legislation, norms, scientific method

There is therefore a category of phenomena to which the characteristic of being “simple” is attributed (in contrast to the so-called complex), ordered by logical models whose capacity for explanation and prediction is continuously tested by means of a system of trial and error that allows readjusting these models in a process of continuous approach to the truth. The progress in the knowledge of these simple phenomena also depends on the measurement tools that are available: statistical methods, more powerful microscopes, laboratory experiments, etc.. The investigation of simple phenomena consists of a process in which it goes to a greater degree of specificity and concretion. It is for this reason that it is difficult to distinguish whether their theories consist of logical models or empirical models, since they mostly consist of the description of relations and functions between given events.

In the opposite sense of intellectual inquiry, complex phenomena are located: their study consists in the statement of the relationships and functions that structure an abstract order of events. An everyday example of such abstract orders of events can be found in the phenomenon of written laws, both procedural and substantive. In them you can find credit relationships, procedural burdens, temporary periods to exercise actions or rights under penalty of estoppel, or prescription or expiration, assigned functions to produce legal norms of general or particular scope, etc.. The application of such abstract models to the concrete reality is known as “jurisdiction,” that is to say “to say the right for the concrete case.” Of course, for this depend elements of proof and a critical judgment that interprets the given events assigning the legal qualification and the legal consequences of that that the law prescribes in abstract and general form. The jurisdictional activity could be characterized as a “simple phenomenon,” however, the same would not happen with the “science of legislation.”

In effect, when what is studied is a legislative reform, what is being done is to increase in degrees of complexity in the study of standards. The legislator is no longer exclusively discussing legal issues. It could do it: study for example the coherence of a new norm whose sanction is under study with the rest of the juridical order, nevertheless still it is extremely difficult to foresee the set of consequences of a reform on the global operation of the juridical order. However, if this is already difficult in itself, it becomes much more complex when philosophical and political issues come into play in the legislative debate. In the legislative debate on the sanction of the norms, a point arrives at which the legal analysis ceases, in the sense that the discussion takes the fervour of the political philosophy or the cold calculation of the negotiation to reach a legislative majority.

[Editor’s note: You can find Part 5 here, and you can read the full essay here.]

Institutions, Machines, and Complex Orders (Part 5): Logical models

06/21/201906/16/2019 Federico Sosa Valle Culture, Law complex orders, costs, Douglass North, F.A. Hayek, government regulation, incentives, innovation, institutions, knowledge problem, logic, public choice theory

There is a thin line between the abstract model of “natural selection of institutions,” its instantiation in an imaginary example that interprets it and the application of that theory to interpret historical experience. The latter does not test the model, but is the result of the organization of the record of events around this interpretive model. The instantiation in an imaginary example is a visualization that allows us to identify the inconsistencies in the model -if there are any- and to test general predictions about the behaviour of the variables. Such interpretations of the model assume that the rest of the variables remain unchanged, that is, the ceteris paribus condition.

If the abstract model does not have inconsistencies, i.e.: if in its imaginary interpretation, contradictory events do not arise, and, nevertheless, its explanatory or predictive power is contradicted with the experience, this does not imply a refutation. On the contrary, it is an indicator that another set of events are acting that neutralize the effects of the process described by the theory. In this case, although the theory does not achieve results in terms of explanations and predictions, it does fulfil a heuristic function: that is, it inspires new lines of research and discovery.

One such line of such lines is, for example, how politics plays out in the process of natural selection of social habits and practices. As indicated by the School of Public Choice, the regulations on economic activity that affect the distribution of corporate profits, assign monopolies, restrict imports, intervene in the market of credits and capital to favour certain activities over others, among others many cases of economic dirigisme encourage the development of practices known as “lobbying.” Investing in human capital and new technologies means an opportunity cost that will never be assumed if higher yields are obtained as a result of influencing government decisions that protect the producer from competition, or allowing the State to sell at a price higher than the market price. Therefore, if experience is indicating a low capacity for innovation, lack of initiative and stagnation, it is most appropriate to focus the observation on which incentives are acting effectively in that country.

The counterpart of the logical models is the empirical models, the latter consist of abstractions of elements that occur in reality, highlighting their common notes to obtain various classifications of such elements, and they are a simplified scheme of perceived reality. However, any system of abstraction of the common notes of a set of objects requires a prior conceptualization of such notes as defining a set or class. In order to classify diverse populations in countries, it is previously necessary to be in possession of the notion of population, for example.

On the other hand, abstract notions are not necessarily conformed by a deliberate operation of consciousness, but by the perception of series of events that are repeated and differentiated from one another, generating in the cognitive apparatus an association of diverse stimuli. Out of habit arises the expectation that from the appearance of a particular event or series of events a range of determined events will follow and not follow another range of events of various kinds. On these spontaneous classifications, articulated around the repetition of events, their differential in the system of stimuli of the nervous apparatus, and the predisposition generated by the habit of waiting and ruling out the consequent appearance of other events and stimuli is that consciousness is conformed and the cognitive apparatus of the knowledge subject.

But, likewise, those “spontaneous classifications” allow the appearance of an abstract set of functionally related notions whose ordering does not depend on a deliberate decision. These are the cases of norms with empirical observation and of what Douglass North called “informal institutions.” The value of the contribution of Friedrich Hayek in Law, legislation and Liberty consists in both the positive legal norms (deliberately created by the legislator) and the informal institutions that condition our conduct also depend for their enunciation of that abstract order of notions that it arises from pure experience.

These logical models -as they are abstract- that make up the consciousness and the cognitive apparatus of the subjects, are in permanent trial and error testing and, therefore, in continuous reformulation. It is a kind of negative feedback process in which the frustration of an expectation is corrected in the interpretative scheme of reality that the individual has, in a process of continuous readjustment. From the invariant reiteration of a certain series of events, a structure is formed that serves as a parameter to order other events of less frequency or more erratic behaviour.

To the extent that the subject continues its experimentation, the spontaneous classification system that makes up its consciousness becomes more complex, incorporating new ranges of events, adjusting its frequency and incorporating new structures. These are the relative limits of knowledge. They depend on the experimentation and the readjustment of the abstract patterns that allowed the subject to classify the events of reality.

However, knowledge can also grow in another direction: consciousness can focus not on the events that come from its perceptions but in the analysis of the classifications themselves. In this activity, the abstract classification schemes that had been shaped by habit do not apply to reality, but reflect on these classifications and extend and reformulate them, not in terms of their experience, but in virtue of their abstract speculation. This is the task of deliberately shaping the logical models to be applied to the interpretation of reality.

The elaboration of a legal theory -for example, about representation-, the description of a market structure -for example, monopolistic competition-, the outline of a sociological explanation -through the ideal types statement, to cite a case- , are situations in which the subject of knowledge does not experiment on events, but reformulates the classificatory systems that until then had arrived spontaneously. Knowledge in this case does not grow in specificity, but increases in levels of abstraction.

These are the cases in which the historian questions not only the interpretative frameworks he uses, but also the conditions that underlie these interpretative frameworks. The philosophy of science dabbled in the scientific paradigms (Thomas Kuhn), or in the research programs (Imre Lakatos), or in the great stories (Jean Francois Lyotard). The common denominator of these three concepts can be found in that they lack an “author,” they are inferences, true conjectures that we make about the framework in which a given scientific community develops tacitly.

Many interpret these currents of philosophy of science, although diverse, as relativistic, since they lend themselves to postulate that the statements of science are conditioned by the historical circumstances that serve as the frame of legitimation. There would not be a truth in itself, but a truth enunciated in a frame of reference. Another way to see it is to interpret these scientific communities structured around a set of practices, procedures, and validation rules whose origin is mainly spontaneous in a sort of “abstract discovery machines.”

In general, a series of physical devices conformed in a process of transforming inputs into exits is called a machine. But such physical devices are organized according to an abstract plane that assigns them functions for a certain process. This plane can be interpreted through mental operations without resorting to the construction of the physical machine, throwing said mental operations verifiable results; we are faced with an abstract machine. In recent times, the term “algorithm” has also been used to compare an information process that does not depend on the free will of the researchers, but consists in the follow-up of an automatic process.

In this line, Friedrich Hayek characterized competition as a process of discovery, that is, as an abstract machine that processes data and yields results that describe reality. In fact, the discovery would be the only function of a system of free competition that gives a differential over the rest of the systems. A monopoly, whose margins of profitability were controlled either by a maximum price or by a tax on profits, would be more efficient in terms of the production of a given good, than a set of small producers without market power and without scale. The scale of the monopolistic producer allows greater efficiency at a technological level than small producers competing with each other, being able to resolve economic inefficiency through regulatory or tax tools. However, in what a system of free competition is incomparably superior is in terms of the discovery process that drives its own dynamics. These are the benefits that innovation brings, as a consequence of an unanticipated system of free competition or competition, which far exceed all the supposed advantages of a regulated system.

It is this innovation that produces, most of the time involuntarily, an institutional system of free competition, called by Acemoglu & Robinson “inclusive economic institutions” – the one that allowed Hayek to characterize it as a process of discovery, in other words, as an abstract innovation machine.

This characterization of innovation processes through institutions that function as algorithms that produce new knowledge can also be extended to scientific communities and to the evolutionary process of legal norms.

[Editor’s note: you can find Part 4 here, and the full essay can be read in its entirety here.]

Institutions, Machines, and Complex Orders (Part 4); Malthus and Darwin: population analysis and evolution

06/20/201906/15/2019 Federico Sosa Valle Culture, Law Charles Darwin, complex orders, dispersed knowledge, evolution, incentives, institutions, natural selection, Robert Malthus, William Easterly

The institutional evolutionism has a history before Darwin, parallel to it and even later divergent. In parallel, Darwin for the elaboration of his concept of natural selection took from the political economy the notion of population analysis by Robert Malthus, the one that also comes from the analysis of the institutions as a framework of incentives. At the time Malthus sought to refute the anarchist philosopher William Godwin, who proposed abolishing marriage as a social institution. Mindful that the extra-marital children lacked at that time fewer rights than those born in marriage, Malthus replied that such a measure would lead to an exponential growth of the population and, therefore, marriage as an institution fulfilled the containment function of population growth. A similar analysis makes Malthus of the laws of poor: aid to the poor increases the cost of food, which generates more poor, assuming the dynamics of a vicious circle. The judgments of Malthus have an empirical character that makes them susceptible of refutation, it can be verified if Malthus was right or wrong. However, what has an abstract, methodological, propaedeutic character is its population analysis. That is what Darwin took to conceive natural selection processes and that today can be used in the analysis of institutional evolution.

When one speaks of a political, economic, or social institution displacing another, such movement becomes effective at the level of the populations. For example, literacy and accounting applied to business administration generates a leap in efficiency in the administration and auditing of businesses. It is not surprising that literate traders who carry inventory and accounting processes displace illiterate traders. This is how literacy and accounting can be extended without any central political decision, nor any disruptive phenomenon. (Of course, the modern state, in its process of rationalization, can impose the obligatory nature of certain principles of accounting or schooling, but not necessarily depend on it.)

To a large extent, the arrival of European immigration to South America in the second half of the 19th century consisted in the importation of habits, practices and techniques that immigrants already incorporated. It is widely known the arrival of new techniques of field work and breeding and care of livestock. Also many immigrants who arrived implemented inventory practices and cash management that were leaking into the rest of the population.

William Easterly characterizes this phenomenon as a leaking of knowledge. Following the example of the previous paragraph: those immigrants were more competitive because they brought with them new techniques of rationalization of time, they took inventories and accounted for income and expenditure of funds methodically. This advantage translated into prosperity and expansion of their businesses. However, in order to implement this type of “technology” they must necessarily share it with their collaborators. There is in these collaborators an incorporation of human capital through what Gary Becker called “on-the-job training”: a learning of how to work at a general level (to arrive at schedule, to concentrate on the task, to meet deadlines) and also at a particular level (particular techniques of sowing, raising livestock, managing a certain inventory system). Human capital is a set of habits and practices that “travels” incorporated in each “apprentice”. In this way, the entrepreneur can finance himself by paying part of the compensation to the dependent in kind: the training. On the other hand, there is the phenomenon characterized by Easterly as “leakage of knowledge”. This knowledge is transmitted, migrated, from person to person. To the extent that it reports a greater utility to its “bearer” it is expanding, extending, throughout the social fabric, often not as a deliberate education, but as an unintended consequence of the use of such knowledge, which, for can be put into practice, needs the help of more than one person.

It is in this sense that what evolve are the practices and habits, in this case of work and business. It is extended by its incorporation by individuals who adopt them, often involuntarily, either through the incorporation of guidelines from their place of work, or through imitation or emulation. Following the terminology of evolutionism, practices and habits are the unit of evolution and the people who incorporate their replicators. A practice or habit is more successful to the extent that it extends into the population. In turn, the populations carrying practices and habits more adapted to the environment will extend them to others.

[Editor’s note: You can find Part 3 of this essay here, and you find the full essay here.]

Institutions, Machines, and Complex Orders (Part 3): Evolutionary drift

06/19/201906/15/2019 Federico Sosa Valle Culture, Law bureaucracy, complex orders, creative destruction, evolution, incentives, innovation, institutions, Max Weber, taxation, William Easterly

The affirmation that one should not judge the historical past with current values forms a topic as widespread as the disobedience to it. However, a conscious exercise of the evaluative critique of the past allows us to identify continuities and disruptions in institutional patterns, i.e., in systems of incentives that are considered legitimate, whether by virtue of a question of social utility or principles.

Caste systems are obvious examples in which a differentiated attribution of rights, that is to say the legal protection of the interests of individuals assigned to a certain ethnic group, was interpreted as legitimate because it was a matter of principle.

While a caste is defined by an ethnic component, or at least with respect to its physiognomic marker, in the status system the ethnic differences lose preponderance, to transfer it to the different private orders or privileges that determine a function within the society. In both cases, both in the system of castes and status, it should be noted that they not only define privileges for its members but mainly establish obligations: war, worship or field work, for example. While the cult is reserved for a certain caste, in the status societies the cult is an institutionalized function, an order, whose members fulfilled certain procedures of admission and permanence.

In any case, beyond the similarities and differences in the systems of castes and status, what matters in this case is to emphasize that such attributions of rights and obligations, that is, of legal protection of interests, collective or particular, do not respond to a question of social utility but of principles. In the first place, because in such societies the power is fragmented and therefore there is no central power that can perform a critical judgment on the social utility of a given system of incentives; at the most, if there is a king, he assumes a role of primus inter pares, an arbitrator between castes or statuses or protector of order.

The emergence of central governments demanded the emergence of stable bureaucracies supported by a tax system to be systematized in a public accounting, that is, a calculation of utility. On the other hand, the incorporation of abstract procedures from private law to the administration of the government, displacing the systems of sages, mandarins, humanists, etc., allowed a better centralization and control and rational administrative decisions. However, what is important to note here is that such institutional innovations did not necessarily depend on a disruptive change, such as a revolution, but that many cases occurred through an evolutionary process, in which more efficient institutions displaced obsolete ones.

The emergence of central governments replaced fragmented political and social systems, because centralization allows a calculation of utility in decision making, which yields better results -not always but most of the time- than a decision system based mainly on honour. Most of the time but not always, since there is the possibility that, in a situation of extreme complexity, the calculation of utility has a wide margin of error and, in contrast, in such situations, a pattern of decisions based on emotions, traditions, or moral principles work as a kind of heuristic better adapted to the circumstances. After all, for the calculation of utility to be viable, it must have tools such as an accounting system, a literate bureaucracy, an abstract procedural system, among others. If you do not have such means, hardly a decision based on utilitarian issues is far from whimsical and arbitrary. Faced with such cases, traditional structures could be more efficient.

Another issue to consider is not to be confused between the rationalization of political power in a central administration – public budgets and control of their execution, a neutral and efficient tax system, administrative decisions of a particular nature adopted according to abstract and general procedures – with the rationalization of each subsystem of society and even of the individual in particular.

It is true that, as indicated by Max Weber, the bureaucratization of political power leads to the gradual bureaucratization of the rest of society: the generalization of the same accounting system for all companies, in order to verify compliance with tax obligations, the public instruction of the whole population, to name a few examples. These processes of rationalization are extremely beneficial and generate a jump in productivity. This is what William Easterly, in his work The Quest for Economic Growth, highlights as a phenomenon in which knowledge leaks and spreads throughout society. In this way the relations of complementarity generated by the knowledge shared with the rest of the individuals that make up a given community are much more important than the substitution effect could give an advantage to a single possessor of such knowledge. For example, having knowledge of accounting represents an advantage over the competition, but that all companies are organized according to reasonable and homogeneous accounting principles allows a jump in productivity throughout the system that yields even greater individual profits. Likewise, not only the leaking of knowledge is beneficial for all members of society, but reached a point is inevitable.

However, this does not mean that a rationalization of the society as a whole and of the individuals that compose it is necessarily possible or desirable; much less that such process is directed from a central political power. A process of compulsive and totalizing rationalization is not always modernizing. Both in biological and cultural terms, the evolution occurs in the margins, it is the mutations of small isolated populations that allow them to adapt to changes in the environment.

Moreover, the totalizing political systems, which not only seek to define from a central power each one of the functions of the social subsystems in function of a supposed calculation of utility, also seek to build a notion of “citizenship” that stifles the sphere of autonomy that defines each individual with civic obligations. Such conceptions are the first to see the processes of innovation and creative destruction and any individual initiative as dangerous. Thus, by cutting off all possible adaptation to changes in circumstances, by mutilating all possible discoveries, it is not uncommon for such political systems to experience stagnation and be displaced by other systems more open to innovation – or at least be invaded by results of said competition, discovery and innovation processes.

[Editor’s note: Here is Part 2; Here is the full essay.]

Institutions, Machines, and Complex Orders (Part 2): Moral and Politics

06/18/201906/15/2019 Federico Sosa Valle Culture, Law complex orders, decision-making, ethics, F.A. Hayek, incentives, institutions, Max Weber, modernity, morality

It is a characteristic feature of Modernity to separate between private morality and public ethics. The first concerns the ethics of principles by virtue of which each individual governs his own sphere of autonomy. Each individual, while not interfering in the interests of third parties, is a legislator, judge, and part of their own moral issues. The law regulates conflicts of interest between individuals, giving legal protection to a certain range of interests and systematically denying it to others (Friedrich Hayek, Law, Legislation and Liberty, Volume I, “Norms and Order”, 1973). For example, in almost all modern legal systems the interest to move and, fundamentally, to leave a territory is protected through the freedom of locomotion. In the meantime, a producer may feel prejudiced by the mere existence of competition and nevertheless he may be denied the right to protection of his monopoly (since a “right” is a legally protected interest). In both cases, questions of principle and questions of social utility are combined.

In most modern systems, the interest to circulate freely is solved more by addressing questions of principles than of social utility – the right to freedom of locomotion is enshrined without addressing arguments about the utility of denying legal protection with respect to another interest. While the problems of protectionism and competition are considered mainly in terms of their social utility, the arguments about whether a certain individual or group of individuals have, as a matter of principle, the right to monopolize an economic activity by the mere fact of belonging to a certain ethnic group, estate, or guild today sounds ridiculous, but not in the past.

The widespread distinction practiced by Max Weber between ethics of conviction and ethics of responsibility continues in force. Individuals, in their private lives, have the right to make decisions following the ethics of conviction, although their principles may be debatable, obsolete, incongruous, and arbitrary. In any case, the consequences will have to weigh on the agents of the decision themselves. On the other hand, the consequences of the decisions of politicians extend to the whole society. The ethics of responsibility becomes relevant here, which, although it may come into conflict with the ethical principles most widely spread among members of society – that is, the current morality – it must address issues related to social utility. This is to say that a substitution of the current morality for welfare economics would be operated.

However, the Weberian notion of ethics responsibility brings with it all the problems of instrumental reason: the means-that is, the resources to be sacrificed-must be proportional to the ends-in this case, the social utility-but remains open to definition what are the values that will define social utility. This is how the question of principles is reintroduced, the discussions about what is right and what is wrong, i.e. morality, in the political sphere. Correlatively, the critiques around the notion of subjective or instrumental reason once formulated by Max Weber are also applicable to the aforementioned welfare economy, so that they retain special validity.

[Editor’s note: Here is Part 1 of the essay. You can find the full essay here.]

Institutions, Machines, and Complex Orders (Part 1): Introduction

06/17/201906/15/2019 Federico Sosa Valle Culture, Law Daron Acemoglu, Douglass North, economic growth, evolution, incentives, institutions, William Easterly

Countries can change their course, they can turn from stagnation towards growth, as it is the case of South Korea in the last fifty years. They can also decline after a boom period. Together with other examples of successes and failures, these are indications that economic performance does not depend on geography, culture, or the education of ruling elites. Following the line expressed by other authors such as Douglass C. North (Institutions, Institutional Change and Economic Performance, 1990), William Easterly (The Elusive Quest for Growth, 2001) and Daron Acemoglu and James A. Robinson (Why Nations Fail, 2012), it is appropriate to maintain that the economic performance of nations, expressed in their growth, depends on the incentives provided to individuals by institutional frameworks. The incentive systems -that is, the institutions- evolve, and with them the fate of the countries. But to achieve such evolution, there must first be a change in the level of commonly accepted notions about what is right and what is wrong for governments to put into practice. That is, what are the principles that should inform the legislative policy that puts into effect such institutional frameworks to order the expectations of society.

[Editor’s note: This is the first part of a new series. You can find the full essay here.]

Liberalism & Jewish Emancipation

05/20/201905/20/2019 Mark Koyama Culture, Law, Liberty English culture, institutions, Israel Finestein, Jewish emancipation, Jews, liberalism, persecution, religious toleration, Thomas Babington Macaulay

Crossposted at Liberal Currents

How did religious freedom first emerge? This is the theme of Persecution & Toleration (CUP, 2019). Here I focus on one part of this question: how did Jews obtain civic rights?

Antisemitism has a long history in Europe. Elsewhere, I discussed its institutional foundations in the Middle Ages. But even as pogroms and antisemitic violence waned, disabilities and restrictions on Jews remained in place. It was not until the 19th century that most were removed in Western European countries. In Persecution and Toleration, Noel Johnson and I argue that this discrimination reflected the political economy of fragile states. Religious freedom was impossible in weak states reliant on religious legitimacy. But this doesn’t answer the question: How did this discrimination end? How did we get religious freedom?

The struggle for Jewish emancipation was a long one. When it finally took place it was closely associated with the emergence of modern liberal states. It was only once the institutional basis for political authority had changed that granting Jews full civil rights became feasible or even conceivable.

Here I will focus on the removal of Jewish disabilities in England. And in particular, I’ll focus on one paradigmatic statement of religious liberty that Thomas Babington Macaulay made in Parliament in 1829 in favor of ending all civil disabilities on Jews. As a statement of religious freedom and liberalism more generally, it is sadly neglected.

Jews faced restrictions on their ability to settle, reside, work and practice their religion in all European societies before 1800. These societies were governed by religion-based identity rules, rules that treated individuals differently based on their religious faith. Britain was relatively liberal; when Jews settled in England following their invitation by Oliver Cromwell in 1655, they were free of most of the discriminatory legislation that burdened them across continental Europe. In particular, they were free of the onerous residency or marriage restrictions that burdened many communities. Nevertheless, they were excluded from political power and from occupations such as the law, government service, and the universities. They lacked religious freedom.

Attaining full religious liberty was a decades-long struggle. Even after disabilities were removed from dissenting Protestants and from Catholics, there was opposition to allowing Jews to sit in Parliament, to graduate from Oxford or Cambridge, or to serve as judges.

Understanding where this opposition came from one requires appreciating how religion upheld political order, even in a society as apparently modern as 18th-century England. Restrictions on dissenters, Catholics, or Jews did not only reflect simple prejudice. Britain was a Protestant nation. Loyalty to the state was inseparable from loyalty to the Protestant Settlement of 1689. The Church of England was a bulwark of the Constitution. Privileges and economic rents were monopolized by the Anglican elite. Catholics, Methodists, Quakers, and Jews were tolerated — they were largely free as private citizens — but they were kept away from political power.

Overturning this required a new basis for political authority. As discussed in an earlier piece on Catholic emancipation by the early 19th century the threat of militant Catholicism had receded while the Church of England was itself a diminished force. Meanwhile, the narrow oligarchic post-1689 settlement was being challenged. British elites were forced to reimagine the sources of political legitimacy.

One of the first to do so was Thomas Babington Macaulay (1800–1859). As an MP, Macaulay was an establishment figure and no radical. But the view of government he laid out was fundamentally different than what had animated his predecessors. It was a secular and liberal view of the role of the state, in which identity rules based on religion had no place. It was in his view only “because men are not in the habit of considering what the end of government is, that Catholic disabilities and Jewish disabilities have been suffered to exist so long”.

“We hear of essentially Protestant governments and essentially Christian governments, words which mean just as much as essentially Protestant cookery, or essentially Christian horsemanship. Government exists for the purpose of keeping the peace, for the purpose of compelling us to settle our disputes by arbitration instead of settling them by blows, for the purpose of compelling us to supply our wants by industry instead of supplying them by rapine. This is the only operation for which the machinery of government is peculiarly adapted, the only operation which wise governments ever propose to themselves as their chief object.”

Macaulay is outlining a liberal, non-heroic, instrumental, view of government. The state is not a project or painting; it is a mechanism for resolving disputes peacefully and facilitating social cooperation. It is a tool meant to serve specific practical purposes rather than a religion or work of art meant to fulfill a symbolic or spiritual need.

Accept this liberal view of the state and the rest of the case for religious freedom follows. As Macaulay put it:

“The points of difference between Christianity and Judaism have very much to do with a man’s fitness to be a bishop or a rabbi. But they have no more to do with his fitness to be a magistrate, a legislator, or a minister of finance, than with his fitness to be a cobbler. Nobody has ever thought of compelling cobblers to make any declaration on the true faith of a Christian. Any man would rather have his shoes mended by a heretical cobbler than by a person who had subscribed all the thirty-nine articles, but had never handled an awl. Men act thus, not because they are indifferent to religion, but because they do not see what religion has to do with the mending of their shoes. Yet religion has as much to do with the mending of shoes as with the budget and the army estimates. We have surely had several signal proofs within the last twenty years that a very good Christian may be a very bad Chancellor of the Exchequer.”

Why did this argument, which seems natural to us, shock Macaulay’s contemporaries? Israel Finestein observed that in “their view it was precisely the religious difference which unfitted the Jew to be a legislator in a Christian country. To them, Macaulay’s argument was dogmatic, even irrational and certainly question-begging”.

Herbert Butterfield observed that

“Those who are interested in the way in which liberty came to emerge will find themselves safeguarded against certain types of error if they will keep in mind that they are looking at the actions and purposes of men as these appear in retrospect — they are making their observations from the hither side of a great transition” (Butterfield, 1977, 574).

Macaulay’s liberal view of the state made sense only on the other side of this transition. It presupposed a state that had moved from religion-based identity rules to general rules. And this transition, as we discuss in Persecution and Toleration, is the bedrock of modern liberal society.

Of course, once emancipated Jews excelled in numerous fields of endeavor and European society at large reaped huge economic and cultural benefits. Emancipation also had a transformative effect on Jewish communities themselves, giving rise to both the liberal Reform Judaism movement and to various strands of Orthodoxy. But emancipation also provoked a backlash.

Though the transition from identity rules to general rules and the attendant rise of modern liberal societies and of economic growth brought huge net benefits, there were many losers – individuals who lost relative status as industrialization reordered the economic order. Many blamed the Jews, who were seen as the greatest beneficiaries of the new liberal order.

Modern antisemitism arose in the late 19th century just as the last restrictions on Jews were being removed. In Bavaria, for instance, emancipation was opposed by a petition of citizens from the town of Hilders who did not wish to “humble themselves before the Jews” (Hayes, 2017, 23).

Liberalism has remained resilient in countries like Britain or the United States where its institutional and cultural foundations were strong, but it is not irreversible. To preserve these foundations it is helpful to remember where they made. From that perspective, the case of Jewish emancipation is both instructive and cautionary.

References

Butterfield, Herbert, “Toleration in Early Modern Times,” Journal of the History of Ideas,
1977, 38 (4), 573–584.

Finstein, Israel “A Modern Examination of Macaulay’s Case for the Civil Emancipation of the Jews.” Transactions & Miscellanies (Jewish Historical Society of England), vol. 28, 1981, pp. 39–59.

Hayes, Peter (2017). Why? Explaining the Holocaust. W.W. Norton & Company, New York.

Johnson, Noel D and Mark Koyama. Persecution and Toleration (Cambridge Studies in Economics, Choice, and Society) ( Cambridge University Press.

Thomas Babington, Lord Macaulay, Critical and Historical Essays contributed to the Edinburgh Review, 5th ed. in 3 vols. (London: Longman, Brown, Green, and Longmans, 1848). Vol. 1

The nonexistent moral decay of the west

04/15/201904/20/2019 Alexander Albrecht Books, History, Liberty, Philosophy crime, demographics, development, History, humanity, improvement, incentives, institutions, morality, Samuel Huntington

Humankind’s struggle with moral is of course nothing new, it rather inherent to our nature to revolt against the meaningless world and the manmade system of reason. Furthermore, moral values vary over a specific period of time swinging from rather high moral standards to very low ones. Regarding morality as an abstract compass guiding our thought, goals and behaviour, Economist, in general, are not known for dealing in depth with the metaphysical reason behind our behaviour yet they explore and explain human actions through our surrounding incentives, which also structure and direct our action. Economist such as Daron Acemoglu & James Robinson or William J. Baumol have explored these changes in human behaviour through changing incentive structures thoroughgoingly.

However, folks mourning the moral decline of today’s west often fail to provide concrete evidence for their argument. They either cherry-pick events or legislatures to infer a macro trend inductively or they lose themselves in difficult language trying to somehow save their argument by making it incomprehensible. I cannot help feeling that mourning the moral decay of the west has somehow become a shibboleth for eloquently expressing the “Things used to be way better back then” narrative. However, I admit that there were probably a couple of sociological papers who have covered this issue very well which I am unaware of. Contrary, the public debate was dominated by a few grumpy intellectuals holding the above-named attitude. I was recently provided with a very concrete set of indicators to measure moral decline while digging through Samuel P. Huntington’s infamous classic “The clash of civilization” from 1996. He states that there are five main criteria which indicate the ongoing decline of moral values in the West. [1]

After being provided with a concrete framework to quantify the moral decline of the west, I was keen to see how the moral decline of the west has developed in the 20 years since the book has first been published in 1996. Although I also take issue with some of these indicators to measure moral decline, I avoid any normative judgement in the first part and just look at their development over time. Furthermore, since Samuelson himself mostly takes data from the USA representing the West, I might as well do so too for the sake of simplicity. So, let’s see what happened to moral values in the West in the last years by checking each of Huntington’s indicator one by one.

1. Increasing antisocial behaviour such as acts of crime, drug use and general violence

Apart from the global long-term trend of declining homicides, we can also observe a recent downward trend in the reported violent crime rate since 1990 in the USA. Scholars agree that the crime rate is in an extreme decline. Expanding the realm towards Europe, you will see similar results (see here).

Source: Statista

Despite these trends, the public (as well as some intellectuals as well I assume) vastly still holds a distorted perception of the crime rate. The sharp decline in actual crimes strongly contradicts the fact that a majority of the people still uphold the myth of increasing crime rates.

Source: Pew Research Center

Regarding drug use in the USA, it is important to mention that the absolute amount of illicit drugs consumed has slightly gone up since 1990. This development is mostly driven by an increasing consumption of marijuana: “Use of most drugs other than marijuana has stabilized over the past decade or has declined.”, states the National Institute on drug abuse in 2015.

Contrary, the number of deadly injections are increasing. However, the share of the population with drug use disorders has remained on the same level of 5.3% over the last 20 years.

2. Decay of the family resulting in increasing divorce rates, teenage motherhood and single parents

It is hard to measure the “Decay of the family” itself. Luckily, Huntington further concretizes his claim by naming some of the measurable effects. There is nothing much to do to refute these statement except for looking at the following graphs.

a) Firstly, the divorce rate is sharply declining.

Source: Statista

b) Second, teenage pregnancy rates are also dropping since 1990.

Source: National Vita Statistics Report

c) Third, the number of Americans living in single parenthood is not increasing drastically since 1990.

Source: Statista

I often take issue when (especially conservative) scholars mourn the declining importance of family. Even if there are certain indicators which would back up Huntington’s claims, he does not name them himself. While it is indeed true that “family” as an institution is undergoing changes, there is no evidence (at least named by Huntington) to back up the claim of a decline of its importance.

3. Declining “social capital” and voluntarism leading to less trust.

It is indeed true, that the adult volunteering rate declined from early 2000 to 2016 from 27.4% to 24.9%. Interestingly, it recently bounced back to a new high in 2018, hitting the 30% target. Really the only point where one must agree to Huntington’s claim is the decrease of interpersonal trust as well as trust in public institutions. This trend is indeed very worrisome considering that trust is a major factor for flourishing societies.

4. The decline in work ethic

The research here is a little bit tricky and points in both directions. Although there has been wide academic coverage of the millennial work ethic scholars could not find a consensus on this issue. Its is especially difficult to extract the generational influence from other key determinants of work ethic, such as position or age. Academics warn to mistake the ever-ongoing conflict between young vs. old with the Boomer vs. Millenial conflict. I haven’t settled my opinion on this one. These Articles from Harvard Business Review and Psychology Today provide a good overview of both sides of the medal.

5. Less general interest in Education

This indicator is particularly interesting for me because as a member of the 90’ generation, I have experienced quite the opposite in Germany. But let’s have a look at the data.

Despite ranking only in the middle in a global country comparison, the US students still made a huge leap in terms of maths and reading proficiency, which only slowed down in 2015:

Source: Pew Research Center

Furthermore, the overall educational level of the USA continues to rise, resulting in the fact that “the percentage of the American population age 25 and older that completed high school or higher levels of education reached 90% [for the first time ] in 2017.” Contrary, there are still major differences when one looks at features like race or parent household (See here), but the overall trajectory of the educational level is sloping upwards.

What do these criteria measure?

As you can see, there is little to no evidence to empirically back up the claim of western moral decay. Furthermore, while many case studies have shown that lack of interpersonal trust, lack of education or a declining work ethic can pose a great threat to society, I refuse to see a connection (a no known to me study disproves me here) between (recreational) drugs consumption, alternative family models, increasing hedonism and moral decline. Thus I believe that many advocates of the moral decay theory regard it as an opportunity to despise developments they personally do not like. I do not imply that everyone arguing for the moral decline of the west is unaware of the global macro-trends which heavily improved our life, but I highly doubt their assumption, that we are currently in a short-to-medium term “moral recession”. Even when one upholds the very conservative statements such as drug consumption adding to moral decline, is hard to argue that we are currently witnessing a moral decay of the west. Contrary, It may be true that Huntington has observed something different in the period before publishing “The clash of civilization” in 1996. Of course, I myself witness the ongoing battle against norms on the increasing hostility towards the intellectual enemy in the west, but one should always keep in mind the bigger picture. Our world is getting better – in the long- and in the short-run; There is no such thing as a moral decline of the West.

[1] Huntington, Samuel P. (2011): Kampf der Kulturen. Die Neugestaltung der Weltpolitik im 21. Jahrhundert. Vollst. Taschenbuchausg., 8. Aufl. München: Goldmann (Goldmann, 15190). P. 500

Three Lessons on Institutions and Incentives (Part 8): Conclusion

03/29/201903/24/2019 Federico Sosa Valle Economics, Law Bourbons, Daron Acemoglu, Douglass North, Habsburgs, incentives, institutions, James Robinson, methodological individualism, polarization, William Easterly

Far from the custom of assigning to cultural factors, or educational, or geographic or relative to the particular constitution of the ruling elites, the three works reviewed – Institutions, Institutional Change and Economic Performance, by Douglass C. North; The Elusive Quest for Growth, by William Easterly and Why Nations Fail, by Daron Acemoglu & James A. Robinson, state an explanation of the progress and decline of nations articulated on abstract incentives, which serve as a structure in which frame the rational agent makes his choices. The four authors have a common reference to methodological individualism, but such an individual agent does not make decisions in a vacuum, but inserted within a framework of incentives.

That such incentives, to act as points of reference for individual action, should materialize historically, does not mean that such conditions for action come from a particular circumstance of time and place, but that they depend on an abstract structure that relates to different terms and that is present in every phenomenon of human interaction.

To finish, it is worth referring to the conclusions reached by North in his referenced work: the case of the two successive Spanish Americas, the Habsburg and the Bourbons. The first extended from the discovery and colonization of America to the early eighteenth century. The viceroyalties of America enjoyed great political autonomy – Spanish immigration had been little and a “Creole” elite had developed – and they were closed to trade, which was limited to the “export” of gold to Spain. With the arrival of the Bourbons at the beginning of the 18th century and the implementation of their Reforms – which from the economic point of view were a resounding success both in Spain and in America – the relationship was reversed: political power passed into the hands of the “Peninsular Spaniards” and an opening of a more fluid trade between the metropolis and its colonies was launched. North explains that the independence movements could be successful due to a transitory alliance between the sectors that wanted to return to the Habsburg system and those who wanted to deepen the modernizing and free-market impulse of the Bourbons. Once achieved independence, these two currents came into conflict, which, according to the author, would extend until today.

According to North’s thesis on Spanish America, there would be two political patterns in tension: on the one hand, an elitist politician who is open to the economy and on the other a “popular” current that is traditionally protectionist. In the second half of the 19th century, success belonged to the “Bourbon pattern” and, in the 20th Century, the “Habsburg pattern” prevailed. In terms of Acemoglu & Robinson, it would be the dispute between a combination of extractive political institutions with inclusive economic institutions and another combination of inclusive political institutions with extractive economic institutions. Of course, in practice, moments of extractive political and economic institutions were also known, as well as short-lived experiences of inclusive institutions, both politically and economically.

The notion of polarized societies used by Easterly can serve as a way to deepen this analysis. It is much clearer to find problems of countries with societies divided into distant and dissimilar regions, in which the policy is expressly articulated as a function of tribes or ethnic groups and which the dispute over public policies expressly favors or harms a another ethnic group. However, as it has been stated, it is not ethnicity or nationality that determines the low economic and institutional performance of a country, but the polarization structure itself, whatever the functions in which such polarization is expressed (language, religion, ethnicity, ideology, etc.). Understanding these latter is fundamental to be able to provide a common thread for a principle of solution.

Just as on the political level an express agreement can be reached on the way to choose who exercises public power and under what conditions, Easterly states a series of conditions related to economic institutions whose agreement would allow for economic growth, regardless of the region, culture, or education of the ruling class of each country. Throughout The Elusive Quest for Growth you can find mentioned to free trade as a main factor of progress, monetary stability and exchange freedom as examples of clear and equitable rules, a state that participates in large infrastructure works but that refrain from arbitrating in the distribution of economic rents among various groups, a low level of public indebtedness, stability in property rights and an independent justice that allows individuals to innovate and save, as well as support programs and incentives to members of society who are immersed in poverty traps.

As mentioned, many times the policy -especially when, in the terms of Acemoglu & Robinson, it is inclusive- consists of the composition of interests of various kinds for the purpose of articulating a government program. From the work of the authors commented here, it can be inferred that, just as there is an agreement on the political plane regarding the rules of the democratic game, which include periodic elections, limited re-elections and division of powers, among others, there should also be a consensus in a body of economic institutions that should be left out of political negotiation, so that economic policy is as neutral as possible against the conflicting interests of which a country with a polarized society is composed.

[Editor’s note: Here is Part 7, and here is the entire, Longform Essay.]

Three Lessons on Institutions and Incentives (Part 7): Breaking the mold

03/28/201903/24/2019 Federico Sosa Valle Economics complementarity, creative destruction, Daron Acemoglu, economic development, entrepreneurship, incentives, institutions, James Robinson, knowledge problem, polarization, public policy, William Easterly

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.]

Three Lessons on Institutions and Incentives (Part 6): Breaking the mold

03/27/201903/24/2019 Federico Sosa Valle Economics, Law Carl Schmitt, Daron Acemoglu, Douglass North, incentives, institutions, James Robinson, legislation, morality, rule of law, spontaneous order, William Easterly

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.]

Three Lessons on Institutions and Incentives (Part 5): “Spontaneous” institutions

03/26/201903/24/2019 Federico Sosa Valle Economics, Law autonomy, coordination problem, creative destruction, Daron Acemoglu, F.A. Hayek, incentives, institutions, James Robinson, liberties, Max Weber, rule of law, spontaneous order

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.]

Three Lessons on Institutions and Incentives (Part 4): Institutions and the Rule of Law

03/25/201903/22/2019 Federico Sosa Valle Economics, Law corruption, Daron Acemoglu, Douglass North, incentives, institutions, modernity, polarization, public choice theory, public policy, rule of law, William Easterly

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]

Notes On Liberty

Spontaneous thoughts on a humble creed

institutions

Institutions, Machines, and Complex Orders (Part 8): Inequality before the law, de facto

Institutions, Machines, and Complex Orders (Part 7): The open texture of the words of the law

Institutions, Machines, and Complex Orders (Part 6): Institutions as algorithms

Institutions, Machines, and Complex Orders (Part 5): Logical models

Institutions, Machines, and Complex Orders (Part 4); Malthus and Darwin: population analysis and evolution

Institutions, Machines, and Complex Orders (Part 3): Evolutionary drift

Institutions, Machines, and Complex Orders (Part 2): Moral and Politics

Institutions, Machines, and Complex Orders (Part 1): Introduction

Liberalism & Jewish Emancipation

The nonexistent moral decay of the west

1. Increasing antisocial behaviour such as acts of crime, drug use and general violence

2. Decay of the family resulting in increasing divorce rates, teenage motherhood and single parents

3. Declining “social capital” and voluntarism leading to less trust.

4. The decline in work ethic

5. Less general interest in Education

What do these criteria measure?

Three Lessons on Institutions and Incentives (Part 8): Conclusion

Three Lessons on Institutions and Incentives (Part 7): Breaking the mold

Three Lessons on Institutions and Incentives (Part 6): Breaking the mold

Three Lessons on Institutions and Incentives (Part 5): “Spontaneous” institutions

Three Lessons on Institutions and Incentives (Part 4): Institutions and the Rule of Law

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

1. Increasing antisocial behaviour such as acts of crime, drug use and general violence

2. Decay of the family resulting in increasing divorce rates, teenage motherhood and single parents

3. Declining “social capital” and voluntarism leading to less trust.

4. The decline in work ethic

5. Less general interest in Education

What do these criteria measure?

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: