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

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

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.]

Elite Anxiety: Paul Collier’s “Future of Capitalism”

Paul Collier, the controversial Oxford professor famous for his development work and his acclaimed books Exodus and The Bottom Billion, is back. But the author of Exodus and The Bottom Billion is long gone. The compelling writing and carefully reasoned world that made Bottom Billion impossible to put down has somehow disappeared. In The Future of Capitalism, Collier is tired. He is bitter. And he is sometimes quite mad – so mad that his disdain for this or that group of thinkers or actors in society consumes his otherwise brilliant analytical mind.

Instead of having his editors moderate those of his worst impulses, he doubles down on his polemic conviction. Indeed, he takes pride in offending people in all political camps, believing that it supports the book’s main intellectual point: ideologues of every persuasion are dangerous, one-size-fits-all too constricted for a modern society and we should rather turn to a communitarian social democratic version of pragmatism – by which he means some confused mixture of ideas that seem to advocate “what works” on a case-by-case basis.

Yes, it’s about as nutty as it sounds. And he is all over the place, dabbling in all kinds of topics for which he is uniquely unqualified to offer advice: ethics, finance, education, family, social policy and on and on and on.

One reason The Future of Capitalism went awry might have been the remarkable scope: capturing all the West’s so-called ‘Anxieties’ – and their solutions – in little over 200 pages of non-academic prose. Given the topic, a very unfitting sort of hubris.

Apart from the feeble attempt at portraying a modern society that has “come apart at the seams,” there’s no visible story, no connection between the contents of one paragraph and the next and hardly any connection between one chapter and another. Rather, it’s a bedlam of foregone conclusions, appeals to pragmatism, dire stings to ideological ‘extremists’ on either side and a hubris unfitting for someone like Collier. I guess this is a risk that established academics run at the end of their careers, desperately trying to assemble all their work into One Grand Theory.

The most charitable thing I can say about Collier’s attempt is that it offers a lot of policy prescriptions – tax unearned land rents, tax-and-redistribute productivity increases, expand housing supply through local governments, have governments direct the Silicon Valley-clusters of tomorrow, cap mortgage finance, benefits for families, expand ethical responsibilities of firms, encourage marriage, create a new G6 (EU, US, Russia, India, Japan, China) that could overcome the global collective action problem (good luck with that!), expand Germanic vocational training and workers’ representation on company boards, embrace patriotism but never nationalism, detach ownership from control and place control with stakeholders (workers, suppliers, local homeowners).

The common denominator seems to be an imperative to do all these things that seem to have worked well in some time or place or utopia, conveniently ignore institutional or cultural reasons, while espousing all ideological positioning and political capture.

Just voicing the suggestions ought to spark at least some fruitful conversations.

Chapter 8, ostensibly concerned with the Class Divide, is an illuminating case study. It takes Collier about 36 pages (out of 37) to mention ‘class’ (not that I blame him: the concept is way too nebulous and politically infected to be meaningfully dealt with in such short space). Instead, Collier discusses all kinds of topics whose relevance to class is quite unclear: public policy for single mothers, German vocational training, lawyers and the rule of law, a Yorkshire project to encourage reading in school kids – not to mention a ten-page digression into the institution of marriage for stable families.

When his polemics, dry writing, unsupported analysis or incomprehensive treatment of a topic hasn’t put me off (I gave up on the book at least four times during the last couple of months), some of the picture Collier paints does resonate with me. There is a social and geographical divide in Britain: the economically flourishing South-East, dominated by the well-educated English and the cosmopolitan accents of almost every language on the planet, is posited against the collapsing towns of the backward Midlands or the North. If this divide is real – in support of which Collier offers next-to-no evidence – it is not clear to me that it wasn’t already captured in, say, David Goodhart’s The Road to Somewhere or Branko Milanovic’s Global Inequality, or for that matter the countless of magazine articles trying to outline the fractures that Brexit unearthed about British society. Considering the effort those authors put into mapping their divides, Collier’s attempt seems frivolous.

He can do better. Much better.
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My fellow Notewriter Rick is organising a summer reading group around Feyerabend’s Against Method. The equivalent Collier reading group could be aptly named Against Ideology.

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

This role of entrepreneurs also depends on an abstract characteristic of technological knowledge: it works in a manner contrary to that of most goods, since it is more productive to the extent that it is more widespread in the population. This characteristic of the abstract nature of technological knowledge is related to the phenomenon of the combination of skills (matching of skills): the negative side of creative destruction lies in substitution phenomena (a computer program of inventory management increases the productivity of work saving the salaries of the army of employees who used to carry them with pencil and paper), but the positive side comes from the phenomena of complementarity.

As William Easterly exemplifies, the cardiac surgeon will be more productive in a first world hospital, where he will have specialized nurses, other qualified doctors like him, a sophisticated system of hospital administration, and so on, being the only cardiac surgeon in a hospital. city ​​of the third world, where it does not have professionalized nurses, nor the help of other medical colleagues, working in a hospital in which he himself has to deal with administrative issues. If there were only substitution relations, it would be convenient for a doctor to practice his profession in the most remote place possible. However, as relations of complementarity of knowledge exponentially increase the productivity of the professionals involved, the doctor will find it more convenient to practice in a health center that has the largest number of doctors and paramedics possible.

The latter does lead to the phenomenon of “traps”: any rational agent, who maximizes the utility of their choices will be discouraged to deepen their studies if they perceive that they can not give any use to their education. There are the cases in which a person discovers that in his country there is no technology or the necessary number of professionals to develop a specific activity, or that, existing, you will find prohibited the exercise of their profession based on restrictions regarding their race, caste, social class, sex, etc. Since, rationally, a person who is included in a particular group under which he will be found forbidden or will be hindered the exercise of his profession, he will find as the most rational of their alternatives to abandon their studies, so that their chances of progress will no longer be limited only by legal or social barriers, but because of their lack of suitability for high-paying functions. Such are the so-called “poverty traps.”

There are also wealth traps. There are those cases in which the individual knows that he is within a favored group or in which he knows a large number of professionals and, therefore, invests time and money in his education because he knows that he has high chances of success, which will then be confirmed. Obviously, such phenomena of divergence generates another problem, addressed both by Easterly and by Daron Acemoglu & James Robinson, which is that of polarized societies.

Easterly affirms that it is the exchange of goods and services, through the mutual benefits that they report to the parties that participate in it, the main source of wealth generation. Where individuals are allowed to exchange, in a stable institutional framework with a stable currency, is where prosperity flourishes. However, Easterly recognizes that bad luck can devastate nations, as are the cases of geological and climatic phenomena such as earthquakes, tsunamis or mudslides, as well as recognizing that the situations of individuals involved in a poverty trap can only be resolved through an active public policy that not only provides education, but also establishes the conditions so that the recipients of that educational system can count on certain expectations that they will be able to apply that knowledge acquired through education and that, consequently, it is reasonable to study.

Just as the bad star can affect the economic performance of the countries, so can a favorable conjuncture, such as the case of a transitory improvement in terms of exchange of a given country. But this favorable circumstance can become a counter-march. Easterly explains that, for a simple statistical matter, it is very difficult for both a nation and an individual to always remain on the crest of the wave, over the years everything tends to return to the average. The problem occurs when a country -or a person, too- got used to a certain level of spending in the boom years and intends to maintain it through debt or emisionism. We come to the cases in which, according to Easterly, the government can “kill the growth.” Public debt and inflation generate capital consumption and, consequently, poverty.

Another way that governments have to discourage growth is through corruption. Not only because it means a transfer of resources from productive activities to unproductive activities, but because it also means a bad signal for citizens. However, in cases of corruption, as noted above, wealth at least changes hands. There is another case, even more pernicious, in which the government’s actions, whether motivated by corruption or inspired by good intentions, destroy wealth, without even redistributing it: this is the case of inconsistent public policies derived from highly polarized societies.

Public policies that aim to favor a given industry, but at the same time need to agree on measures with other sectors of the economy, whose purpose is to compensate for the losses generated by those policies, can lead to a tangle of inconsistent regulations that, instead of transfer riches from one sector to another, directly destroy them. For example: exchange controls harm the export sector, since they generate black markets. The exporters will have costs that will be partly quoted according to the black market prices (which are higher) and they will have to liquidate the value of their exports at the official exchange rate, which will be lower. Regulations of this kind may not involve acts of corruption, but they do destroy wealth, which there is no way to recover.

Easterly lists numerous examples of everything that needs to be done to destroy growth. However, there is something that deserves to be especially highlighted: the progress or stagnation of nations does not depend on educational, cultural or geographic factors, but rather on the incentive framework that predominates. This incentive framework will always be abstract, that is, it can be applied at any time and place.

[Editor’s note: Here is Part 6, and here is the entire, Longform Essay.]

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

Daron Acemoglu & James Robinson call the set of regulations that obstruct innovation “extractive institutions.” Of course, here again, extractive institutions are less harmful than the total absence of institutions. Not every change in the status quo can be interpreted as “creative destruction” or “entrepreneurship.” As Friedrich Hayek pointed out in Law, Legislation and Freedom, so that the most mutually compatible plans can be carried out, it is necessary that a well-defined set of expectations be systematically frustrated: the usurpations, the frauds, collusions, the paramilitary bands, etc., etc. The main thing is to have institutions that guarantee a minimum of order. Now, many times the institutions manage to be put into effect as a result of having the consensus of a certain number of interests that see in the law an opportunity to extract benefits. It is the distinction between Acemoglu & Robinson between the already mentioned “extractive institutions” and “inclusive institutions.” The latter are constituted by that set of rules that formally are equal for all and that materially protect private property, the value of money, competition understood as freedom of entry to markets, among other values ​​of modern capitalism.

The distinction between extractive and inclusive institutions can find its parallelism in the expressions of “Rule by Law” and “Rule of Law.” The first consists on the accommodation of general and abstract normative statements with a second intention: to benefit a group at the expense of society as a whole. It is common to hear the criticism that the law has a false neutrality and that therefore any defense of the “Rule of Law” must be ideological (in the Marxist sense of the term). However, what distinguishes the concept of “Rule of Law” from “Rule by Law” is that, for the first of the terms, the consequences are unlikely to be predicted in terms of their particular and even more individual, while the second has an intentionality, declared or hidden.

To give an example, the procedural due process has such a degree of abstraction that it can hardly be predicted who will benefit from those proceedings. However, a law that prohibits the importation of a product of domestic manufacture clearly aims to redistribute resources from consumers to the local producers (although this type of regulation usually also generates consequences that are very difficult to foresee and often contrary to its original intentional).

Critics of the Rule of Law state that it is not neutral, because it protects exclusively the interests of the proprietors. However, such criticism loses sight of the fact that in the Modernity, any inhabitant, even those who are not citizens, can have access to the right to property, regardless of whether or not they belong to a certain caste, class, or social class. This, unlike the legal and political systems of the so-called Ancien Régime, which limited access to private property in perpetuity and irrevocably to a certain group of people, or even more, to a certain clan or group of families. It does not matter if, in Modernity, a person does not own any particular good, as long as he can count on the expectation of being able to become one at some time. In this sense, private property understood in the modern sense as that right that any inhabitant can enjoy from having stability in their possessions to the point of only being stripped of it by their own consent or by following the procedural due process.

This unlike laws protecting infant industries, professions or trades, or promotion of certain activities that are deemed as socially necessary or valuable, which establish a regime of transfers of resources from one sector of society to another. As the School of Public Choice indicates, such laws encourage “lobbying” and reduce the efficiency in the allocation of resources. In such institutional arrangements, individuals and businesses do not prosper through the discipline of serving the consumer, but through political agreements. Economic agents continue to maximize, but at the expense of regulations that deliberately establish certain winners (the owners of protected activities) and certain losers (consumers and potential producers who are denied access to protected activities). Under these circumstances, the citizenry begins to perceive an arbitrary sense in the norms and have no moral issues with challenging them (any contraband, without commercial purposes, is a clear example of this). Obviously, when non-compliance with standards becomes so extensive, regulations become ineffective. Moreover, as James M. Buchanan put it in his brief essay “A policy in the interests of producers,” the stagnation generated by protectionism means that the winners of such a system – the protected producers – turn out to be less rich than they would be in an open and competitive institutional framework.

Sometimes protectionism seeks its foundation in a mistaken theory of “original accumulation.” (Joseph Schumpeter ruled out the validity of such proposals by pointing out that, although those could have had some basis until the 19th century, the development of capital markets made this theory completely obsolete.)

However, neither Douglass North, nor William Easterly, nor Acemoglu & Robinson, deal with the problem of original accumulation. They prefer to encompass such phenomena within the set of erroneous theories that serve to justify policies arising from political agreements in polarized societies. This means that a certain institutional arrangement, an economic growth policy, a stabilization program, a constitutional reform, foreign policy and so on, in a polarized society is not inspired by abstract and formal principles but in concrete goals that benefit certain sectors of society above others.

The examples of polarized societies, to which Easterly and Acemoglu & Robinson turn, come mostly from African countries since these are mostly created in the process of decolonization and comprise different ethnic groups and languages ​​within themselves, so polarization is much more evident: certain policies benefit a certain ethnic group over another. Easterly specifically cites the case of an African nation in which an ethnic group that represents 10% of the population lives in the region where a certain commodity is produced and whose export generates large revenues and, in the meantime, the government is elected, with some exceptions, by 90% of the remaining population, which imposes export rights on the said commodity, whose collection is destined to industrialization plans that systematically fail.

It is often tempting to explain the failure of such industrialization plans for the corruption evidenced in their execution. In fact, corruption cases are verified, but public policy would also fail even if those involved were incorruptible. Many times bad policies destroy much more wealth than political corruption. Corruption implies a transfer of resources and, therefore, an inefficient allocation of resources, while bad public policies result in the destruction of wealth.

However, examples of polarized societies in African countries can generate confusion around the main message of The Elusive Quest for Growth and Why Nations Fail. The economic performance of nations has nothing to do with geography, culture, or lack of preparation of the ruling elites to draw the plans of government. Easterly holds the main responsibility for the rise and fall of nations in incentives, while Acemoglu & Robinson point to the institutions that establish such incentive schemes. Regarding the opinion of Douglass C. North, although his line of research can lend itself to a “culturalist” interpretation, he himself recognizes the disruptive change of formal institutions as a determining factor of economic performance.

In summary, the three works discussed here have as a common denominator the role of incentives as a determinant of the economic performance of countries, above culture (which North would call “informal institutions”), geography, or the level of education of its elites. However, the case of polarized societies is presented as a critical point of such approaches.

José Luis de Imaz in Los que mandan (The ones who command) had defined politics as the activity consisting of articulating diverse interests according to a coherent plan of government. The definition of Imaz deserves to be put back into use, since it addresses the problem of polarization and also because its double edge allows to tie the loose ends left by the visions that we can group, with greater or lesser precision, under the “neo- institutionalist” (clearly the case of North, although it would be pending to discuss the label for Easterly and Acemoglu & Robinson).

Notwithstanding, that polarization is manifest in tribal or caste societies does not mean that it is not present in other societal forms. In the United States, the north and south; in Europe, the separatist movements; in Argentina, the interior and Buenos Aires. With greater or lesser intensity, manifestly or latently, politics is always structured on a space of tension of interests in competition for resources. Those who frequent the work of Carl Schmitt often claim that trade and law are “civilized” means for the exchange and dispute of such resources, politics and war are on the other side of the same question in terms of intensity of the conflict.

However, the term institutions – which define incentives – does not refer only to deliberate political agreements in pursuit of a specific purpose, such as a given public policy. The concept of institution also concerns a series of abstract and general principles whose final result at a particular level no one can foresee, because their level of abstraction imposes an insurmountable limit for the knowledge of its concrete consequences.

[Editor’s note: Here is Part 3; Here is the entire, Longform Essay]

Three Lessons on Institutions and Incentives (Part 1): Introduction

There are books that are aimed at a spectrum of readers that are counted within the “well-informed public.” They are not books confined to academic circles, they are not for mass consumption, but they do concern problems that involve entire countries and are written in a register that involves certain intellectual training. In this genre, there are three works that have much to say about the relationship between institutions and incentives. The first of them dates from 1990 and was published by a Nobel Prize winner in Economics, Douglass C. North: Institutions, Institutional Change and Economic Performance, which elaborates the distinction between formal and informal institutions and incremental and disruptive institutional change, ending with a historical analysis that seeks to explain the differences in economic performance between the United States and Latin America. It is an academic book that can be approached by the said well-informed public.

Eleven years later, in 2001, William Easterly published The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. It is proposed as a political essay in which an economist interprets his own professional experience as a member of international teams for the development of Third World countries. To do this, drawing on the theoretical notions of other leading economists, such as Paul Romer (who later, in 2018, received the Nobel Prize in Economics), he makes an assessment on the development plans for the Third World that were implemented since the end of World War II. The central thesis of Easterly stresses that, in order to have an empirical relevance, every theory of development -or of the absence of it- must carry the following behavioral postulate: “people respond to incentives.” If this reality is not taken into account, there is no public policy that can be successful. The main lessons that can be drawn come from the theoretical instruments deployed to explain the political dynamics of most of these countries, particularly in regard to the phenomenon of polarized societies.

The third book to consider is also the more recent publication. Why Nations Fail, by Daron Acemoglu & James A. Robinson, was published in 2012 and reached the global debate on the realm of the well-informed public. The proportions achieved by the population of academics and professionals, in addition to the extension of the internet, allowed the aforementioned book to generate varied opinions along both traditional and digital media throughout the world. Acemoglu & Robinson dedicate their pages to those countries that were successful, as well as those that were not, but also here, in the case of this book, the most juicy lessons truly comes from the conceptual structure that articulates the whole book. Among such notions, we find those of inclusive and extractive institutions, which in turn are divided into political and economic institutions. The worst of the institutions are preferable to the total lack of institutions. Thus, a country organized around a closed political and economic system will be preferable to a failed state. However, once a certain degree of centralization and institutionality has been achieved, it is preferable to move towards a pluralist democracy and a competitive economy. The challenge is how to accomplish such transitions.

Since there are still four years left until the year 2023 – following the periodicity of the selected works – we are still in time to make a brief synthesis of the ideas that can be applied to the analysis of the impact of the institutions on economic and political incentives.

[Editor’s note: this is the first part of a rich series on institutions and incentives. You can find the full, Longform Essay here.]

RE: Economists’ Statement on Carbon Dividends

I just got an email asking me to sign on to an open letter arguing for some carbon tax policies. I’m seeing some push back from (smart, economically literate) Facebook friends, but I think it’s a viable step in the right direction.

Here’s the statement paraphrased:

We think global warming is an important and urgent issue and we recommend these five things:

1. A carbon tax is the best, most cost-efficient way to do as much about carbon as needs to be done. [For a given level of carbon reduction, I agree. How much carbon reduction should happen (and how much at government behest) I am deeply agnostic about.]

2. We think this should be phased in over time and should be revenue neutral. [Yes on both points, but the rest of the statement makes it seem like they’re talking about a pretty short time horizon. I’m not sure how fast is too fast, but I’m sure there’s such thing.]

3. A carbon tax is more efficient than a set of specific regulations. [Certainly!] It’s also less likely to be subject to changing political winds. [Is it though?]

4. We should also apply a carbon tax to imported goods. This would reward energy-efficient American firms and prod other countries to follow suit. [Hmmmm… I can’t really disagree with the general principle, but this sounds like it will require bureaucratic oversight that will be subject to regulatory capture. On the other hand, we’ve already got that.]

5. We should give the revenue collected back to U.S. citizens, to offset increases in energy prices. [Okay, but if it’s going to be revenue neutral and come with a transfer scheme, that’s going to take some detangling!]

I buy into the notion that carbon emissions create large scale externalities that will probably be more bad than good on balance. Not universally bad, mind you. And not something that humanity won’t ultimately adapt to. But I think the people who will face the brunt of the bad outcomes will be the world’s poor (who we should help migrate to better climates!).

I don’t think we can just impose “the right” carbon tax and have everything come out just right. Even though I routinely draw out the case with a supply and demand graph in class, the truth is that nobody has access to those curves in real life. But a small tax can serve to reduce the inefficiency of pollution even if we don’t get it exactly right.

The revenue neutral part is important–we’re currently taxing lots of things we actually want more of (like investment). So if we can cut those taxes by taxing things we want less of (pollution), we’re reducing two sources of inefficiency in the current setup. Of course you and I have bolder views about what policy should look like in 100 years, but restricted to a 10 year window, a revenue neutral carbon tax looks pretty good to me.

The letter dramatically over-simplifies things. Climate change is probably a problem, but probably not as big a problem as proffered by proponents of proposals to prepare for apocalypse. It’s not clear to me that we have a good idea of a) all of the effects (good and bad), b) how people will adapt, and c) how people will adapt to a changing policy regimen.

Figuring out how to handle the tax on imports will be difficult and rife with rent seeking. Unmentioned is the impact on exports. If all our trading partners follow a similar policy, there’s no problem, but in the mean time there’s a tension that will probably be resolved with some unfortunate bit of rent seeking.

I’m sure most reasonable people would agree that instantaneous change would probably be unduly costly, but it’s not clear what the right speed of implementation is.

There are some miscellaneous rhetorical points I have issue with, but I suspect those are in there to throw a bone to people who aren’t me.

I hope that 10 years from now this open letter looks a bit silly. But I also hope that 10 years from now pollution taxes start to replace more inefficient taxes. On balance, I’m happy to see the letter prodding us in that direction.