Pareto's Republic and the New Science of Peace

by Filip Palda

  Captivity is the subject of historian William McNeill’s celebrated book, The Rise of the West. In it, he suggests that Europe rose to world dominance two hundred years ago because its people became mobile. Mobility allowed both human and physical capital to flee oppression and seek out regimes that favoured them. Talented and rich Europeans found safe haven in countries such as Holland and England that protected property and the person. France and Germany had no option but to follow the English and Dutch examples, or perish from a brain drain and the flight of capital. Carlo Cipolla lists detailed examples of European countries that tried to influence the flow of labour to their advantage. He cites the case of Venice, which forbade caulkers from emigrating, or France, which encouraged master steelworkers to visit, and when that did not work, resorted to kidnapping them at the prompting of Finance Minister Colbert. McNeill concludes that instead of growing, Europe would have stagnated had one empire managed to gain control and impose its will on a captive people, as was the case in China.

  Recently, scholars with access to detailed modern data have been able to give statistical support to McNeill’s historical analysis and have refined our understanding of the benefits of mobility. Most of this evidence comes from the United States and some focuses on competition between school districts. Student performance is intensively measured in the social sciences and so provides a ready indication of how public schools perform. One finding of these studies, as summarized in a paper by Michael Marlow, is that high performing school districts have a “spill-over” effect on their neighbours. One mechanism that forces under-performing districts to match their better performing rivals is the migration of parents and the loss of tax base that results.

  Other research considers the entire United States as a laboratory for policy, with each state serving as a test tube. Political scientist William Barry discovered that states are forced to compete with each other for lottery customers; if the terms of the lottery in one state are poor, citizens of that state will cross to the neighbouring state to shop for tickets where their odds of winning are better. The pressure that people exert on government by voting with their feet is in part responsible for what social scientists call “policy diffusion.” In the US, successful sub-federal government policies make their way, or “diffuse,” across county and state borders. Information about the effects of those policies encourages neighbouring citizens to lobby for change, and if change isn’t forthcoming, to threaten that they will move away from the control of inept governments. The pattern of diffusion of government services is similar to that for private goods. At first, adoption is slow and mainly the act of a few risk-taking politicians. As the benefits become obvious, the risks of adoption fall and other areas hurry to imitate the pioneers. In this way mobility spreads information, expands choice, and puts pressure on government to offer its services at competitive tax prices.

  “Voting with your feet” is perhaps the most fundamental way for people to control the costs of government. It is likely the fount from which springs democracy, as most people understand it. To vote with one’s feet, one need not register with an election commission, nor wait for a pre-determined election period to run its course, nor worry about the constitutional validity of the electoral outcome. All one need do is move to put competitive pressure on politicians. The most direct evidence for the fact that rulers fear their subjects voting with their feet lies in their efforts to either keep people in place or to render useless their migrations. Absolute rulers favoured the direct approach of tying people to the land. The late Roman Empire forbade citizens to leave their provinces. Medieval knights ensured themselves a cheap supply of labour by imposing serfdom. The Soviets and their satellites took this concept to unimagined lengths by building a system of fortifications called the Iron Curtain inside of which, for the first time in history, weapons pointed not outward at the enemy, but inward at the population.

  Variants on these forms of imprisonment persist in some poor countries, but today’s rulers prefer a more subtle approach to the challenge of mobility. Voting with one’s feet becomes futile when government finances are concentrated at the highest level of government. There is no point in moving from one municipality to the next, or in crossing regional borders, if all decisions about spending emanate from the nation’s capital. Voting with one’s feet only works when the tax dollar follows the taxpayer. Of course, voters may still vote with their feet by moving to other countries, but trans-border brotherhoods of politicians have found ways to defend themselves against this type of competitive threat. In the European Union, member states banded together to impose similar tax rates and regulations across the Eurozone, leaving citizens with nowhere to shop for cheap government. What politicians of the union call tax “harmony,” and regulatory “rationalization,” is an attempt to impose a uniformity of government from which escape is difficult. The effort the European Union has devoted to homogenizing taxes and regulations stands in contrast to the almost complete indifference the union has shown to regulating the formal democratic institutions of member states.

  Democratic institutions that foster information and choice are of little concern to politicians once they have managed to insulate themselves from competition by continent-wide agreements that limit the reform of taxes and regulations. That the power of democratic institutions depends in part on the structure of government finances and regulations is a point seldom emphasized in textbooks or spoken of in public debate. Czech president Vaclav Klaus was the only European leader to warn of the danger that the centralization of authority posed to national democracies. His prophecies came true in 2010 when European fiscal rules took precedence over local democratic institutions in a manner that led Greeks to riot. The issue in question was the value of the euro, which is tied to the fiscal balance of each member nation. After years of pretense, the Greek government admitted its debt was close to twice the value of its GDP. Instead of dealing with this problem by submitting to the will of electors, the government was bound by its membership in the EU to return to fiscal balance. The central character of the European currency made nonsense of the ability of Greek voters to influence their government.

  Solution #2 for what ails political competition: democracy

  Political competition is a concept. Democracy is but one instrument for putting that concept into practice. This is why the present chapter kicked off with a discussion of competition, and why now it is proceeding down the list of means by which to attain it. The first instrument discussed was mobility, or so-called “voting with your feet.” Now we turn our attention to democracy and the questions of what benefit it brings and how to get it.

  It is impossible to escape the image of democracy as people voting either for representatives, or casting their ballots directly for some law, as they might in a referendum. This is a functional image because it is reflected in many of the variants of democracy we see in action and because it helps us sidestep the need to overdefine democracy. There is no need. Everyone knows it when they see it and it does not take an intellectual to point out the original from the fake. All variants of what people think of as democracy share the feature that they try to impose competition on politicians by giving citizens an orderly means of either removing leaders from office or bypassing these leaders entirely through a referendum.

  This, at least, is what one hopes. Yet as in the case of voting with one’s feet, voting at the ballot box may or may not contribute to political competition. We saw that politicians could neuter the efficacy of voting with the feet if they could somehow manage to standardize policies across national or governmental borders, thereby rendering the notion of mobility meaningless. The same problem of inefficacy can plague democracy. More than half the world’s countries have “paper democracies,” which are well summarized by the Roman magistrate Licinius Macer. Over two thousand years ago, he told his people that “you have been stripped of every privilege your forefathers left you except your ballots, and by them, you who once chose your defe
nders now choose your masters.” In today’s world there are dozens of countries that hold similarly meaningless ballots, and even in countries with strong democratic traditions, such as those in Europe, political scientists are talking about a “democratic deficit” emerging as the feeling grows in voters that they are unable to influence policy.

  The lesson is that the institutions of democracy, such as voting and election campaigns, do not by themselves produce political competition. Some added ingredient is needed. The clue to what that ingredient needs to be lies in a remarkable coincidence: we observe no examples of real democracy without property rights being present. Robert Heilbroner wrote in Twenty-first Century Capitalism that, “democratic liberties have not yet appeared, except fleetingly, in any nation that has declared itself to be fundamentally anticapitalist” (page 69).

  This does not mean that property rights inevitably lead to democracy, but rather, that democracy cannot function without them. Property rights are a necessary, but not a sufficient condition for democracy to emerge. Economist Dan Usher explored this point at length in his landmark book, The Economic Prerequisites to Democracy. He warned that a majority winning power at the ballot box by orderly and peaceful means can be just as rapacious and vengeful as any conquering army. Something more than mere balloting is needed to prevent whoever wins at the box from using the coercive power of government to exploit groups who lost the election. To become something more than an instrument for large scale theft, a democracy must exist alongside what Usher described as a fair, inviolable “system of division.” People must trust they will be able to divide resources under rules that are equitable and stable and that these rules will resist the comings and goings of governments and popular whims. In principle, many such systems may exist, but in practice, only a system of property rights, protected by rule of law, has proved itself capable of shielding people from the potential excesses of democracy, while restricting government towards questions of public goods and tragedies of the commons.

  The dangers of democracy without some background system of restraint were well understood by Voltaire in 18th century France when he equated mass rule with mob rule. They are acutely understood today in Iraq, which has reacted badly to the American attempt at a democratic graft. Sunni Muslims, who are a minority, rightly fear that elections will favour Shiite Muslims, and that this group will limit Sunni access to the mineral wealth of Iraq. The fear arises because petroleum is in government hands, and is there for the taking by whoever controls government.

  Sentiments in China are similarly inclined. While tragic, the massacre at Tiananmen Square in 1989 may have been an attempt by the government of China to stop an even more cataclysmic scenario: the eruption of civil war. Democracy could not have come to China in 1989 because property rights had not yet fully arrived. Once China establishes these rights in some stable form we may well see democracy emerge peacefully, as it did in South Korea, Taiwan, and Singapore, which all laid a firm base of property rights before embarking on democratic experiments.

  The above ruminations on the preconditions for democracy may seem relevant only to developing countries, but they also hold a lesson for rich countries that have grown smug in the belief that they represent the pinnacle of this institution. Countries that won their democracy long ago, and benefited from it over generations, now face its slow erosion. In a brilliant survey of government growth since the 1870s, Vito Tanzi and Ludger Schuknecht showed not only that governments grew from ten to fifty percent of national income in a one hundred year span, but also that most of government spending by the end of the 20th century was devoted to redistributing money rather than spending that money on building bridges and funding other forms of infrastructure.

  This growth in the redistributive function of government is alarming. As a government grows in its power to redistribute resources, it also attracts so-called “rent-seekers,” who use democracy as a means to plunder the collective wealth stored in the treasury, much as poachers plunder natural forest preserves. Ordinarily people think of redistribution as a benign function which governments fulfill in order to help the needy. Yet redistribution is a much broader activity than this notion allows and may have a sinister aspect when the giving goes to people or groups who are not needy but simply powerful and greedy. To block these rent-seekers, modern democracies have had to become less democratic. Constitutional courts are busier than ever and we hear a great many complaints about “court-made law.”

  Yet what else could we expect? As the pot of money upon which they sit grows, governments become reluctant to make new laws that could further influence the distribution of income in society. Supreme Courts, which can act like small dictatorships, then get burdened with the duty to resolve questions that are simply too divisive to be discussed democratically. The lesson is that the more a society socializes property, the greater is the need for a government that limits conflict between groups by putting strict limits on collective decision making. This explains why “social democracy” is a contradiction in terms. The more socialism you have, the less democracy you can afford. Europe is deep in the dilemma of how to reconcile big government with popular demands for a say in that government. North America still has what might be called vibrant democracy, but that may change if government there continues to bloat.

  The two good things about democracy

  If the economic prerequisites are sufficient to produce a democracy in which people can focus on deciding issues of public good rather than in using government as a means to rob each other, then two good things follow. The first good thing about such a democracy is that it produces leaders who are sensitive to the public’s needs and who can satisfy these needs competently. The second reason is that democracy imposes upon leaders certain restraints and incentives that also drive them towards satisfying the public’s need for public goods and the protection of common property resources.

  With reference to the first benefit of democracy, what does it mean to produce a leader sensitive to public needs? Economists are coming to believe that the first order of any business, be it private or government, is to get the right people into the right places. This may sound like a truism, but it is actually one side of a fine distinction. The right people are those who do the right thing, no matter what temptations they may face. The other side of the distinction is that no matter who is in place, it helps if that person has incentives, such as punishments and rewards that encourage him or her to act in the interests of the business. So basically, two things determine whether people behave according to some norm: their inner voice telling them what to do and the outer incentives they face.

  A story can make the distinction clear. After WWII, Czechoslovakia became a communist country. The incentives communism offered its people to work were contradictory and usually insufficient to produce the required motivation. But people did work for many years, because that is what they had been trained to do in pre-communist regimes. The “right” people were in place. And that is what mattered most for enabling the communist regime to function in its first few decades. Eventually, though, the right people retired and the people who took their places were those raised in a society without any clear laws or property rights. This was the death-knell of communism. After the fall of communism in 1989, Czechoslovakia found itself a country of cynical shirkers whose caustic outlook on work had been shaped by generations of living in a country where there was no connection between effort and reward. Yet even these shirkers responded to the re-introduction of property rights, which had the immediate and electrifying effect of getting people to respond to basic market incentives. Soon long lines at grocery stores disappeared and food and clothing started to be in more plentiful supply. However, to advance beyond this initial stage of development, a second revolution was needed to get the right people in the right places so that big projects such as shopping malls, hospitals, airports, and banks could be established. What Czechoslovakia (and eventually the Czech and Slovak Republics into which they
split) needed was a mechanism by which people best suited to business could rise into positions of responsibility.

  What has any of this to do with democracy? If we have a democracy based on property rights, then public office is not the road to personal riches. Property rights are secure. All that government can do is to seek the public good. It can do nothing else because the private pie is protected by law from being cut up through government interventions. Personal glory and a sense of working for the public are the only rewards one can expect in such a system. This reward structure draws in people who have a peaceful mindset and whose goals rise above the material. True democracy is based on property rights, which in turn are an implementation of the peaceful dispute resolution mechanism underlying Pareto efficiency. Taken from the inverse perspective, Pareto efficiency as a principle of peace percolates up from property rights to the manner in which societies govern themselves, a manner that invites as its highest exponents men and women steeped in a belief that peace should reign.

  Here, then, is why democracy can be seen as arising from and propagating a civilizing tendency. True democracy weeds out individuals with barbaric leanings and produces leaders steeped in civility. These, in turn, promote better property rights and further enhancements in democracy. It is not popular these days to make such stark distinctions, but the task of describing Pareto’s Republic is not a popularity contest. It is based on the alarm now being raised in economics over the importance of institutional mechanisms that determine how people use and develop their talents.