by David K. Levine, Andrea Mattozzi and Salvatore Modica on April 23, 2017
Acemoglu and Robinson argue that the reason nations fail is because of their institutions: there are inclusive institutions that represent a wide range of interests and there are extractive institutions in which a few steal from the many. Inclusive institutions lead to economic success and extractive ones lead to economic failure. Democracy is good and autocracy is bad - not just for our liberty but for our economic well-being. We might well ask whether this is wishful thinking or if it is true. The graph below shows per capita income for two countries since 1960: one starts low and ends much higher - it is an economic success as the other is a failure.
Which country has the
more inclusive institutions? The economic failure is India: the
shining success of democracy among post World-War II newcomers.
The economic success is China: a country which has never known
democracy. Notice that it is possible to create all sorts of
comparisons - but the China-India comparison is a crucial one
because the two countries contain about two and a half billion
people - roughly a third of world population. By contrast those
who point to places such as Hong Kong or Singapore must reflect on
the fact that these are very small and special cases.There is no
reason to believe that institutions that work well in Singapore -
a rich city protected from greedy neighbors by strong geographical
barriers - would work well in the hinterland of China.
The example of China and India is surely not an advertisement for
the idea that the way to economic success is through inclusive
institutions as Acemoglu and Robinson assert. More importantly, it
highlights an important difference between democracy and
autocracy, which is missing in the Acemoglu and Robinson
narrative. China shows both the strength and weakness of
autocracy. With bad rulers you get the horror of the
cultural revolution. With good rulers you get the greatest growth
in economic welfare in the history of humanity. By contrast India
- with its well-functioning democracy and peaceful transitions of
government - has held a more steady course: it had neither the ups
nor the downs of China.
As many have argued, policy matters as well as institutions.
“Good” institutions can generate bad policy as in India and “bad”
institutions can generate good policy as in China. Nor is it the
case, as some political scientists assert, that autocratic
governments are condemned to short lives due to their inherent
contradictions - that "coup proofing" by autocrats weakens
institutions to the point at which they are doomed to fail. The
history of China is a strong (and large) counter-example. China
maintained autocratic rule through a professional bureaucracy for
roughly 1300 years from 605 CE (some would argue 134 BC)
until 1905 CE a period of generally high prosperity - and far
longer than any democratic institutions have survived.
Democracy - and inclusive institutions more broadly - are surely
imperfect. We are all familiar with the two most important
imperfections: the power of special interests to subvert
democratic rule and the power of the many to elect foolish and
short-sighted populist governments.
Two of us grew up in
a country famed for its cronyism and corruption. The other of us
became interested in the issue of corruption and special interest
lobbying in 1998 when the U.S. Congress passed - on a voice vote
without dissension - the Copyright
Extension Act. No large group of voters voted for or asked
for this. The act extended retroactively 39 years of additional
copyright protection for works that had originally been promised
56 years. It does not require
a Nobel prize in economics to understand that increasing the
length of copyright in 1998 on books produced before 1978 in no
way changes the fact that they already exist - the only allowable
reason
in the U.S. Constitution for copyright. On the contrary -
the effect is to take money out of the pocket of the many
who do not hold copyrights and put them in the pocket of the few
whose copyrights are about to expire - with some money being lost
along the way. Even more remarkable: Supreme Court justices who
asserted that only the dry letter of the law matters upheld this
act not only ignoring the fact that retroactive copyright in no
way serves to "to promote the progress of science and useful
arts", but ruling in addition that an infinite length of time is
limited - a conclusion that might cause even King Canute to blush!
The Copyright Extension Act is by no means the worst result of
successful special interest lobbying: AIDS deaths in Africa due to
patent protection, bank bailouts transferring money from the
middle income many to the rich few are certainly more serious. But
the point is that the outcome of most lobbying has some degree of
ambiguity associated with it. Retroactive copyright extension does
not: it is a pure money grab by relatively rich copyright holders
from everyone else. Larry
Lessig, who had spent his entire career writing and thinking
about copyright - and who argued against the constitutionality of
the act before the Supreme Court - was so dismayed that he gave up
working on copyright to focus on special interest politics. His
solution - and his campaign platform during his brief 2016 run in
the Democratic presidential primary - is simple: get the money out
of politics. Replace private campaign funding with public.
Implicit in this is the idea is that campaign funding is the
primary avenue through which corrupt special interests bribe
politicians. Would that it were so simple!
We might start with the obvious fact that a number of regulators
are appointed: Supreme Court justices do not campaign for office,
so if they are corrupt changing laws regarding campaign
contributions is unlikely to solve the problem. Moreover, public
funding of political campaigns has been tried extensively in other
countries - without, it seems, eliminating corruption. Take
Ireland where political campaigns are publicly financed: in
September 2008 the Irish finance minister used 64 billion Euros of
taxpayer money to bail out private banks that had made some bad
bets. Or take Italy where public financing of political campaigns
has been introduced and banished at various times. Italy is not a
country known for its lack of corruption - and these various
changes in campaign financing do not appear to have had much
effect.
What if campaign financing was only the visible tip of the
iceberg? Far more effective means of bribery are to give in kind
gifts, to give money to a family member, or to offer a good job
after leaving office. Chris Dodd was once known as the Senator
“from Disney” for his role in pushing through whatever copyright
protections the movie industry demanded. After he retired
from the Senate he took a several million a year job as the CEO of
the Motion Picture Association of America. His job was that of a
lobbyist: to meet government officials and persuade them that they
should support the movie industry. But is the message he brings
"our proposal is good for the American people?" or is it "look at
me - if you play ball like I did you too can one day be a rich and
sleek lobbyist?” How many 31 year olds have been offered a
$600,000 a year do-nothing job as “special correspondent” for a
television network? The only one we know of is the daughter of
Presidential candidates.
This is not to say that the problem of lobbying is an insoluble
one: indeed autocracies as well as democracies have to contend
with corrupt state officials and special interest lobbying. In
China and Turkey this problem was once solved by requiring that
government officials should be castrated male slaves who were
separated from their families at an early age. Unfortunately, this
solution seems unlikely to be acceptable in the current social
environment. The more moderate solution adopted by the Catholic
Church - celibacy - does not seem to have worked particularly
well.
To see how democracy
can easily go astray a simple example may help. Suppose that we
live in a cold country where everyone can light a fire to keep
warm but at a cost to others who must suffer from the smoke. In
this direct democracy, people vote on regulations: each regulation
prevents a specific person from lighting a fire. There is an
existing status quo of regulations and each election one
regulation is chosen at random to either be added or subtracted by
majority rule. Since every regulation is favored by everyone
except the person it is directed against, every new regulation is
approved and no existing regulation is ever removed. Eventually we
wind up with no fires.
The problem with no fires is that it could be good or bad
depending on whether the benefit to the individual of having the
fire exceeds the cost to the others of the smoke: either way there
are no fires. If fires are socially bad then democracy works. If
fires are socially good then democracy fails. Indeed, in the
latter case we have the classical example of a Condorcet cycle: if
once fires are banned and we have a referendum on whether to
abolish all regulations, it will pass unanimously and we will
start all over again banning fires one at a time. Moreover if
fires are socially good then corruption is good as well: it would
be best if public officials could be bribed to look the other way!
Just because something is good for a special interest does not
mean it is bad for society. For example, it is often argued that
in countries with excessive regulation the only reason the country
functions at all is because these regulations can be avoided by
bribery. Italy is both excessively regulated and famously corrupt,
and India does not look much different. Of course it might be best
to have more moderate regulation, but to decrease regulation it is
first necessary to overcome the special interest lobbying of the
bureaucrats who get employment (and bribes) from the existing
system.
One of the most
astute observers of special interest politics was the late Mancur
Olson. Olson argued that inevitably as time goes on, more
and more special interests arise until they strangle the economy
entirely. It is certainly true that countries that are notably
corrupt such as Italy and India are not great economic
powerhouses. But we can hardly describe them as abysmal failures.
Italy has maintained a standard of living high by world standards,
and India as the graph above shows has had slow - but steady -
improvement.
Unfortunately, the historical antidote to corruption is populism:
a far more dangerous phenomenon. Populism is indeed the popular
backlash against successful lobbying and rent-seeking. In the
early 21st Century, for example, modern populist movements in the
U.S. and Europe grew as the corruption of the banking sector and
of experts became painfully clear during the financial crisis.
Those who were able to do so used taxpayer funds as life-rafts to
escape the consequences of their own bad decisions. In the 2016
U.S. Presidential primary the populist proposals of Donald Trump
on the Republican side to a large extent matched those of Bernie
Sanders on the Democratic side. Both argued strongly for "America
First" especially when it comes to trade. Both demanded for the
average voter some of those protections from competition
previously reserved only for rich and successful special
interests. Populism is political victory through the ballot box
and is the inevitable consequence of successful rent-seeking by
the small special interests groups who dominate lobbying.
This is not the entire story: for example, the change in social
networks over time has also played a role in the surge of
populism. The increased mobility of workers between jobs and
locations and decreased interest in religious and other activities
has loosened the social networks that used to underly the
political party system. In the “old days” in Britain workers in
the labor party socialized in their pubs while conservatives
socialized in their clubs. Today suburban commuters go their
separate ways and nobody knows their neighbors. As social ties are
loosened, the peer monitoring on which the system of mass
political parties was founded becomes more costly. This resulted
in lower turnout, it reduces barriers to entry in the political
market, and eventually leads to a larger potential market for
insurgent and populist parties. Without, however, a guarantee of
success: over first half of the second decade of the 21st Century
we have seen mixed electoral success by populists: success in
Greece, the UK and the US but failure in Spain and the
Netherlands.
The danger of
populism is that there is little guarantee that populist movements
will achieve their stated goals. Indeed, popular remedies are
often as harmful as folk medicine is for the genuinely ill patient
- and not just metaphorically: the Italian populist movement M5S
is anti-vaccine. Looking around we see that Trump far from
draining the swamp has deepened it; Brexit is on track to crush a
thriving British economy; in Greece Syriza has managed the nearly
impossible task of adopting economic policies even more harmful
than those of its predecessors; while the oil powerhouse Venezuela
now lacks amenities such as toilet paper. Looking farther across
time we see that Peronism in Argentina condemned the country to
decades of economic stagnation, while Mugabiism in Zimbabwe has
condemned an entire nation to poverty. By contrast the US populist
Teddy Roosevelt brought antitrust law and other measures against
monopoly that mitigated rent-seeking without much harmful side
effect.
We see here at work a third fundamental problem with democracy:
the curse of rational voter ignorance. Even after years of study
resulting in a PhD in economics; even after years of academic or
practical experience after a PhD, the consequences of economic
policies are at best uncertain. While agreement among experts is
greater than realized by the general public, there still is
legitimate disagreement. It could not possibly be sensible for an
individual voter - whose vote makes little difference - to invest
years of effort in hopes of deciding what are the best economic
policies.
Because we cannot sensibly know ourselves what constitutes good
policy we must rely on experts. Indeed, even those who denounce
academic experts and pretend unwillingness to rely on experts,
nevertheless follow like sheep their own “experts” like Rush
Limbaugh, Michael Gove and Donald Trump. And therein also lies a
dilemma: to know who is a true expert and who is a charlatan
requires a lot of knowledge. Not perhaps a PhD in economics -
maybe only a MA? And this is a problem that cannot be solved by
direct democracy in which laws are passed by referendum. To know
how to vote in a referendum we must trust experts to tell us.
If this wasn’t already enough, there is more. Even if we can
distinguish experts from charlatans, experts have their own
agendas. Experts as well as politicians can be corrupted. For
example, the famous academic economist Frederic
Mishkin accepted $124,000 from the Icelandic Chamber of Commerce
to praise its regulatory and banking systems: this only two years
before the Icelandic banks' catastrophic collapse. Nor to our
knowledge has he been denounced by his colleagues for this. Owing
to social pressure experts - like the police, doctors, or any
other professions - rarely discipline within their own social
networks. The supporters of populist movements are quite right to
distrust experts after all!
This may all sound pretty hopeless. Yet we live in a period of time during which economic well-being has increased faster and to much higher levels than ever before in history. So let us ask: what did we do right - and how can we keep doing it?