Pareto's Republic and the New Science of Peace

by Filip Palda

  The alarm was raised as early as in 1993 by economists Andrei Schleiffer, Kevin Murphy and Robert Vishny. They showed how societies can spiral into ruin when a brain-drain pulls people out of productive activities in the private sector towards predatory activities at the helm of government. They argued that predatory activities may become more profitable as the number of predators increases. Robbers in small bands are easily caught. As the size of the band increases, the risks fall and the expected gains rise. Also, as predation increases, victims hire some predators to ward off others. Predators in this case are like the unscrupulous doctor who gives his patient drugs that sicken him so that he returns for further treatment. The transfer of talents from productive to predatory activities may accelerate to such a point that society disintegrates into a chaos of warring groups. Friedrich Engels sounded an earlier, similar warning. While discussing the outcome of contests between multitudes for booty, he predicted such conflicts could end in “famine, pestilence, and the general barbarization of both armies and people.” Democracy spares us from this apocalyptic scenario by elevating into power people who specialize in providing peace.

  Even if the type of people who go into politics are not of the most benevolent disposition, democracy has a secondary advantage, which is to provide leaders, be they good or bad, with an incentive to behave efficiently. As we learned earlier in this chapter, political competition controls the tax price people pay for their chosen level of government services. Competition achieves this by providing voter-consumers with a choice of potential leaders and with information about them. Voter information and choice constrains the ability of politicians to behave inefficiently or corruptly. Democracy is one means of getting this competition. Of course we may complain that we feel stuck with the need to trust our leaders with most decisions. We blame democracy for being a popularity contest, focusing on personalities rather than issues, but that may be an efficient response to the complexity of the tasks that government faces, and an admission that the right person in the right place may be more important than any incentives that person faces.

  While the debate on the importance of incentives versus personalities continues, what should be clear by this point is that this debate’s most fruitful lesson is that collective decision-making procedures should be called upon sparingly. To reduce collective choice, fraught as it is with non-competitive potential, we should be alert to divesting government of any activity which no longer calls for collective management. Government should be on a constant state of alert for the means by which it can render itself less relevant.

  The end of politics

  The problem with democracy or any other system of providing competitive politics is that government is a recalcitrant subject. Unlike a cell phone or a pizza, you cannot consume government services in manageable slices. Your consumption of government comes as a fixed bundle of services. Your willingness to pay plays no direct role in your consumption. Nor does the politician’s compensation depend on whether he or she satisfied you directly. When a consumer’s willingness to pay becomes muted, and a producer’s reward for good service is unclear, then it becomes difficult to coordinate the supply of government services with the demand for them.

  Elections try to balance popular needs with government resources, but no one pretends the correspondence is perfect or that everyone is as tightly satisfied as they are in the market for private goods. Researchers try to find the means by which demand and supply for collectively consumed goods can be balanced, but in my view they are fighting a rear-guard action. Democracy can put peaceful people into office. That is its enduring benefit. But then it stumbles in fulfilling the more refined function of providing some Pareto-efficient level of public goods, such as might be called for with Samuelson’s rule.

  This shortcoming of democracy should not be a paralyzing concern. Democracy helps us scoop up most of the big bills lying on the pavement. We need government to build public infrastructure and protect property rights. Here is where the biggest stash of bills is to be found. Democracy and other schemes for political competition put into power leaders who are adept at helping society pick up most, but not all, of these bills, regardless of what momentary political incentives they may face.

  Societies based on dictatorship, or some other such arbitrarily violent form of rule, are geared towards being governed by violent individuals. These predators have a diminished sense of where the big bills lie because they either do not care or are unable to pick them up. The problem with non-democratic societies is one of personality. You cannot separate the violence from the office. The signal contribution of democracy is to allow people to rise to power without reference to violent tendencies.

  What should trouble us is when those in power try to erect barriers to the entry of competitors with new ideas and attitudes. Barriers to entry are a never-ending challenge to democracy, as they are to private markets where dominant firms are forever trying to bar new competitors so as to entrench their monopoly positions. The difference, though, is that in commerce, firms cannot use coercion to help them, whereas coercion is government’s distinguishing feature.

  Democracy and the rules under which government should work are a bit of a mystery to most researchers. What is emerging with some certainty is that if you are going to have a Pareto-efficient society, which at its root is based on a principle of peaceful reconciliation between individuals, then this principle of peace needs to carry over to the government that rules them. Democracy playing out in a society where property is protected under the rule of law is the best bet for such a peaceful arrangement.

  FUTURE

  Allow me to summarize this book in one paragraph. Conflicts inevitably occur over the way physical and human resources are to be used. We can never eliminate antagonisms or animosities between people. These will inevitably arise over questions of resource use. Yet we may be able to channel violent inclinations into peaceful and even productive ways of resolving disputes. One means of channelling these inclinations is to give people property rights protected by the rule of law. With these in place, every disagreement over the use of property is resolved in such a manner that no one is made worse off and at least one person will be made better off. Any such exchange is called Pareto improving. Once people have exhausted all the Pareto improvements possible, they have attained a state of Pareto efficiency. This “peace of Pareto” is superior to other forms of imposed peace, such as central control, because it balances what people owe each other in a more precise and humane manner, one that leads invariably to prosperity. Yet it is impossible to allocate all resources using property rights because sometimes these rights simply cannot be created or established or determined. When property rights are absent, markets fail to correctly balance social accounts; government may step in to correct the imbalance, as it may in the case of public goods and common property resources. The problem then becomes one of ensuring that government, to whom we entrust a monopoly, if even temporary, over coercion, does not abuse its powers to charge a non-competitive “tax price” for doing its duty of plugging the gaps left by incomplete private property rights. More critically, government must be prevented from acting in a short-sighted manner due to the political market’s problem of establishing competitive property rights over government power.

  This cursory summary of the present book is not a master plan for creating Pareto’s Republic. If anything, it should be clear from this book that societies do not follow scholarly guidelines for self-improvement. Yet I do not subscribe to the school of thought that sees society as some mysterious entity proceeding rudderless on its own towards undefined ends. And I see as eccentric the view put forth by Nobel Prize winning economist George Stigler, that if commercial markets could be trusted to behave efficiently, why not believe that political “markets” would also be efficient, and so why seek to change them? In his view, an efficient political market shares with economic markets the feature that every decision that takes place is such that no one could furth
er benefit without someone else getting hurt. Stigler does not distinguish between democracy and a dictatorship. He posits that both systems consist of interest groups vying for control of government resources. These groups use politicians as their agents to broker deals on how government should intervene. Deals will continue to be negotiated by the political go-betweens until at least one interest group sees no benefit to participating. In his essay, Law or Economics? Stigler wrote that “every durable social institution or practice is efficient, or it would not persist over time,” a line which might have got a chuckle or two out of inmates huddled around the campfire of some gulag or concentration camp, as they learned that their captivity was a manifestation of efficiency.

  What Stigler neglected to explore was that efficiency does not come about by itself. Someone has to make systems efficient. That someone could be you, convincing friends that the system has to change and adjust to become more efficient, and they in turn pass the message on. That someone could be the academic who puts in comprehensible form the message that there are opportunities for creating property rights and public goods that go unexploited so that there are “big bills lying on the pavement” for us to take, if only our political system were to change. What this means is that something is blocking people from making deals that could be mutually profitable. It takes effort to spot and then pick up the big bills. They are not simply lying meretriciously on the pavement. Yet with the proper understanding of the importance of property rights and of competition in democracy, and at the base of things a willingness to follow a peaceful means of resolving our differences over the use of resources, we may well scoop them up. After a savage war with their northern brethren, South Koreans decided to become a peaceful people and to express that peace first through commerce, and then through the ensuing democracy. The move to democracy was not accomplished by a revolution of arms, but by an evolution of faith and understanding. The insights of scholars who brought to light the ingredients of competitive markets and competitive politics were a crucial part of that understanding, as they were in Chile’s transition first from socialism to property rights in the 1970s, and then from dictatorship to democracy in the 1980s.

  Still, there are no guarantees that simply by knowing the ingredients of Pareto efficiency a society can attain that state. There are two challenges to attaining and then maintaining Pareto’s Republic. The first and greatest challenge is that of overcoming prejudices and group hatreds. These are fundamentally inimical to any form of productive peace. When antagonisms are too powerful in the very specific sense that I will describe below, property rights or democracy become overwhelmed by the demands upon them to funnel aggression into productive pursuits. The second challenge is more ongoing. It is to fight at every instance the tendency of governments to absorb resources and place them under public control. This is not the cry of the libertarian or neo-conservative, but rather a concern that arises from ongoing research into the dangers of creating common property. Here are my reasons for selecting these two as the most pressing challenges.

  Insuperable antagonisms

  The peace of Pareto’s Republic is not to be found everywhere. In fact, few countries have managed to even come close to fulfilling the ideals I have outlined here. No one can identify all the barriers to attaining a Pareto-efficient society, but societies too riven with internal hatreds between groups will not be able to explore mechanisms for obtaining peace between individuals. As economist and peace researcher Syed Mansoob Murshed writes,

  The difference between aspirations and reality during a period when general material conditions are improving may induce disadvantaged individuals to revolt. This, however, is more likely to take the shape of organised group conflict when individual and group grievances merge, simply because collective action is easier. (page 2)

  This is one example of a more general problem that economists describe as “the non-separability of preferences from production.” Less technically, this means that if two groups of people hate each other sufficiently, they will indulge their “tastes” for hatred and fail to come to a deal that would financially profit both sides. Shakespeare provides an early illustration of this point. The Montagues and Capulets could have very profitably married their children to each other, but because of an ancient family hatred, they lost the opportunity to join in love and commerce. In Vom Kriege, Carl Von Clausewitz wrote of the “primordial passions of people to prolong war, ignore authority, and escalate conflict” against what appeared to be their best interests.

  Labour market economists have understood the danger of non-separability of preferences and production since Gary Becker’s ground-breaking work on the economics of discrimination in the 1950s. Competition is powerless to weed out those who link emotion to commerce if all share the same emotion. Racial and gender discrimination in the labour market can last generations if a critical number of employers share the same hatred of targeted groups. Only if some employers care more about their bottom line than about categorizing workers can discrimination be eradicated. Employers who put profits above hatred can draw skilled workers from the discriminated class away from their bigoted competitors and so drive those competitors out of the market.

  Unfortunately, the same sort of competitive mechanism works poorly in politics because you cannot drive a socially accepted group out of the “political market” the way you can drive a company out of the commercial market. A Laundromat that discriminates against minorities may have to fold up because its competitor is willing to hire minorities at wages commensurate with their productivity. The failed Laundromat operator exits the market and perhaps becomes a bus driver or a reporter. In contrast, white supremacists cannot be driven out of politics because there is no mechanism for making them leave, similar to the private market mechanism of profit and bankruptcy. This is why Pareto efficiency stands little chance in a society of massed hatreds. It is only a mechanism of dispute resolution in a setting where animosity is individualized, and in consequence can be marginalized through competition for property rights.

  Alexis de Tocqueville described these sociological challenges more elegantly in his Letters from America, in which he said of American society that, “…the more I see of this land, the more convinced I am of this truth, that there are virtually no political institutions radically good or bad in themselves and that everything depends on the physical conditions and social state of the people to whom they are applied.” Thomas Malthus echoed this sentiment in the tenth chapter of the first edition of his book, An Essay on the Principle of Population, where he wrote, “But the truth is, that though human institutions appear to be the obvious and obtrusive causes of much mischief to mankind; yet, in reality, they are light and superficial, they are mere feathers that float on the surface, in comparison with those deeper seated causes of impurity that corrupt the springs, and render turbid the whole stream of human life.”

  Societies can, and do, slowly escape from turbid depths of group hatred, and perhaps the slow introduction of property rights has something to do with that. This is the sociological dimension of Pareto efficiency which is only now coming to be appreciated by scholars. The example of the Dutch illustrates this point. The history of Holland can be seen as the quest to expand its landmass by building dikes around ocean flats and pumping away the sea water. The complexities of dike management forced different groups of landowners to negotiate with each other for the rights to drain water from one property to another on its final destination to the ocean. Paradoxically, the “selfish” institution of property led to extended negotiations which forced everyone to compromise and develop a spirit of cooperation. Today the Dutch are among the most “socially conscious” people in the world. No one can say for sure, but perhaps because of their powerful commercial sense and pioneering efforts to create and sustain complex property rights the Dutch were able to combine rapid population growth with a continued sense of community. At around the same time as Holland was developing a decentralized system of prope
rty management, China toiled under what historian Karl Wittfogel called “hydraulic tyrants.” They dictated how water from the Yangtze should be shared among peasants. This approach to administration retarded China’s development of property rights so catastrophically that when Europeans arrived in the 19th century, their armies imposed their wills without contest. They found a divided land in which dozens of cultures and regions were too estranged from one another to join forces and repel invaders. Social solidarity was weak in China without the secure property rights that people needed for settling arguments in a peaceful manner, and by doing so, acquire the habit of peace.

  A similar lack of solidarity is evident in many of today’s post-communist countries where past leaders intuitively understood that the stability of the regime lay in to dividing one person from another. Many people who moved from the former Soviet Union to America were shocked that Americans cleaned up their dogs’ droppings in parks and were puzzled by parents who volunteered time to coach sports, or raised funds for cancer research. They believed that acts of charity and community work were not supposed to flourish in a selfish capitalist society. The communist regime had not explained to these people that acts of altruism are to be expected of people who have been trained by the handling of private property to consider the consequences of their actions on others. Pareto-efficient systems run on lateral lines of cooperation, and agreement between property owners paradoxically endows a system of free trade in property with many of the imagined features of socialism.