by Filip Palda
It is in the former Soviet Union, the erstwhile flag-bearer of communism and absent property rights that social apathy reigns, charity is sparse, brutal selfishness is on display, and people live by the motto well known from communist times: “he who does not rob from the state, robs from his family.” This value vacuum is a hangover from socialism which, as Paul Zak, a founder of the field of neuroeconomics, writes, provided “innumerable incentives to be non-virtuous. This lack of values is understandable when one seeks to survive, rather than thrive. Purges, gulags, and innumerable spies do not make a virtuous society.” So powerful, in fact, can the effect of central control be that the effect can change people’s preferences for generations. In a study entitled, Goodbye Lenin (Or Not?), Alberto Alesina and Nicola Fuchs-Schündeln found that in the former East Germany, forty-five years of heavy state intervention and indoctrination
instilled in people the view that the state is essential for individual well-being … the effects of communism are large and long lasting. It will take about one to two generations for former East and West Germans to look alike in terms of preferences and attitudes about fundamental questions regarding the role of the government in society. (page 1507)
We are only starting to build an understanding about whether property rights can reduce fundamental animosities between groups of people, yet ground-breaking research in the young field of neuroeconomics suggests there is reason for optimism. If the answer turns out to be yes, then a valuable lesson will have been learned which may help some societies to slowly dissolve the hatreds that divide them and accelerate their progress towards Pareto’s Republic.
The challenge of Malthus
Even societies that somehow manage to solve large-scale animosities within must realize they will face many economic ups and downs until they have built a foundation with private property rights and devised a style of government that provides public goods at a competitive price. That is because property rights are tools that allow people to make decisions in ways that balance social accounts. When these rights are incomplete, flawed, or nonexistent, then calculations people make in their own self-interest can push society into troubling cycles of boom and bust, as the following tale illustrates.
Writing two hundred years ago, Thomas Malthus argued that any increase in productivity that led to a multiplication of food, or clothes, or coal, would encourage people to breed. Procreation would rise to the point, he felt, where the population would be larger, but no individual member of it would be any better off than before because hungry mouths would have multiplied to devour the surplus. Before society settled down to this neutral state, it would experience periods of excessive growth in population as people bred more quickly than warranted by supplies, and periods of population decline as excess numbers perished for want of supplies or in conflicts over these supplies.
In chapter ten of the first edition of An Essay on the Principle of Population, Malthus speculated that the boom and bust of populations around a state of subsistence are exacerbated by a lack of property rights. Malthus did not go into details but historical research since then suggests that when people enjoyed an unexpected bounty such as a salary increase they did not have much choice in how to invest that bounty for the future. Investing in property or shares was extremely hazardous due to the still fragile nature of property rights. An attractive alternative was to convert the unexpected bounty of food into added offspring. The one investment that held hope of paying something back was to put resources into having children. Being brought up in a largely lawless society also meant that parents did not have to pay the full price of their children’s upkeep. By foraging and robbing, children could maintain the caloric levels needed to survive while shifting the cost to others. This swarm of hungry waifs contributed to the overexploitation of resources which ultimately leads to the sort of general impoverishment Malthus observed. Boris Pasternak wrote of a similar scenario of need in a time of lawlessness in his native Russia. In Doctor Zhivago, commissar Yevgrav says, “I told myself it was beneath my dignity to arrest a man for pilfering firewood. But nothing ordered by the Party is beneath the dignity of any man. And the Party was right. One man desperate for a bit of fuel is pathetic. Five million people desperate for fuel will destroy a city.”
Economists James Brander and M. Scott Taylor have produced a detailed mathematical model of Malthusian population growth in the absence of property rights and their findings do not make for happy reading. They write that,
A modern case that might be consistent with our model is Rwanda, which entered the news during 1994 because of a violent civil war. This war was normally attributed to ethnic tensions between Hutus and Tutsis, but more careful analysis suggests the possibility that Malthusian population growth, resource degradation, and resulting competition for resources was at the root of the conflict. Between 1950 and 1994, the population in Rwanda quadrupled. The boom began in the 1950s when advances in health care and agricultural practice led to increasing real incomes and rising net fertility. By the 1980s what had been an open frontier was “filled up,” and real living standards started to fall. Conflict over land between Hutus and Tutsis became increasingly severe, culminating in a civil war in which a significant fraction of the population was killed. (page 134)
Political scientist Thomas Homer-Dixon’s vast survey of environmental degradation and social strife in countries with insecure property rights supports Brander and Taylor’s work and goes so far as to suggest that China may fall into chaos if it cannot resolve these problems. Rich countries are safe from Malthusian population cycles, in part because they have managed by tremendous effort and trial and error over centuries to establish regimes that protect property rights, but the property rights solution has brought its own form of perniciously inspired fluctuation. Any advocate of Pareto’s Republic will acknowledge that to protect property rights and provide other public goods, we need government. Government must pay for property-rights-protecting services by levying taxes. Yet, as we saw in the chapter on democracy, governments can fall prey to political market failure. To enjoy the competitive drive that democracy gives to government, we must also limit terms of office. This limit means that property rights to power are short-lived, with the consequence that political groups take a short-term perspective of the taxable economic base. This base can be thought of as a common property resource, with the distinction that here the issue in contention is not a fishery or a forest, but rather the wealth government can tax.
These fiscal commons are the setting for Malthusian cycles in the economy. Every increment in private wealth generated by the creative use of property rights leads interest groups to increase their claim on the taxable base. The higher taxes that result may in turn slow the economy, which in turn may reduce interest group activity so that in the ebb, the economy recovers, thereby setting the stage for a renewed cycle. This story can be played out on many different stages and goes by a variety of names. In the animal world, biologists call it the predator-prey cycle, and have developed a complex mathematical model of how it works. Political scientist William Nordhaus and economist Alberto Alesina speak of “political business cycles” to capture the essence of these interactions between politics and the economy. Economists and public choice scholars are blunter. They speak of what Dan Usher has called “dynastic cycles” that govern the rise and fall of predatory classes. Whatever language you use, the point is similar. We live in a world of economic ups and downs created not just by chance scientific discoveries, or unexpected natural disasters, but also by the interactions of those who hold property rights and those who wish to use the force of government to enjoy the fruits of these rights.
The cycles that result from the interaction of politics and the economy should concern us, because they reflect a never-ending imbalance in social accounts that may one day become too difficult to sustain. This imbalance arises from a tragedy of the fiscal commons that provokes an over-harvesting through taxes of the economic base. The harvest is
too great because those who feed upon its fruits now are not necessarily those who will pay the consequences later. The economic boom years of the 1980s led to an unprecedented rise in the size of government. Political optimism outstripped economic realism because the officials at the helm of the government juggernaut knew they would not be around later to pay for the mistaken forecasts upon which they were basing their expansion. When Western economies collapsed in the early 1990s few politicians were held to serious account. We were fortunate then because we were pulled back only two steps for the three we have taken forward in the 1980s, but the examples of Tsarist Russia, and Argentina in the 1930s give us pause. Both countries seemed on a solid path towards prosperity, yet both succumbed to struggles over the fiscal commons that plunged them into economic catastrophe lasting close to seventy years. The failure of both these great countries was one of failing to protect property.
Getting there
To summarize this chapter so far, the biggest challenges to building Pareto’s Republic are twofold: entrenched group hatreds and the difficulty of establishing private property rights while at the same time containing the inevitable lack of property rights over government power. I wish I could give clear instructions for bringing about changes that will resolve these challenges, but I cannot. I do not know for certain how to get to Pareto’s Republic. This does not mean the place does not exist but rather that the path to it is mysterious. I can say with greater certainty that I recognize the place when I am there, and that if we at least know what our destination looks like, we will be able to tell if our path has brought us to the right place.
That place is one where control over resources is shuttled about through the exchange of property rights until the resource ends in the hands of the owner who can maximize its potential. This is what is called Pareto efficiency and it has other desirable features, such as allowing large, fast-moving societies to function with a minimum of coercion from government. The Republic is not a utopia. Pareto efficiency cannot eliminate hostility and aggressive impulses. It can redirect them towards productive pursuits even though ill feelings between parties to an exchange may linger. How many tenants feel warmly about their landlord? How many passengers feel grateful for flying knee-to-chin on a charter flight to the Bahamas? While the peace of Pareto may be a prosperous one, it is not necessarily a loving peace. Nor is it a refuge from uncertainty. Pareto efficiency guarantees that no one who enters into an exchange believes that his or her interests are harmed at the time of the agreement. It is not a pledge that property will hold its value or that the new owner will not have a change of heart and regret a purchase. The yearning for communal life based on the older principle of the Golden Rule is evident among people who live in modern industrialized societies. Perhaps Pareto’s Republic is only a stop on the way to some future, very different form of social organization.
No matter what the future holds, at present, Pareto’s Republic produces the richest, healthiest, and safest environment in which to live and is the source of almost all the world’s scientific discovery and artistic exploration. Yet the difficulties of building the Republic are so great in most countries, and progress so slow, that hundreds of millions of people who live outside its confines try to immigrate to countries that are based on property rights and the rule of law, the vectors of Pareto-efficiency. It is almost unheard of for anyone to leave the Republic to live in countries where the law of the strong prevails and resources are the cause of unending struggles that make people quite tired of their lives.
If history is a guide, then the answer to reaching Pareto’s Republic may lie in these huge international migrations. As the example of Europe roughly four hundred years ago showed, usually the most highly trained and productive people are the ones to leave their countries, creating a brain drain to nations that are based on property rights, thereby enriching them and impoverishing the countries left behind. If the leaders of countries left behind persist in their morbid nostalgia for retrograde governments based on theft, then sooner or later they will be invaded or bullied by neighbours, thereby sending a cautionary message to other countries that fail to reform. A less drastic development will be that the elites of inefficient countries will simply sell their power to international conglomerates. Something like this is happening in parts of the Congo and Angola, where China has leased vast tracts of mineral and agricultural properties the size of small countries. Under the protection of security forces they have imported, the Chinese are regularizing the exploitation of these resources and perhaps laying the basis for rule of law once the leases expire.
For the competitive strain of international migrations to have a fruitful effect on governments that resist reform, some model on which to base it is needed. The model I have proposed in this book is based on Pareto’s definition of economic efficiency and is the result of several decades of research by thinkers from many fields who, I believe, are creating a new science of peace. Of course, the model is an ideal. Even countries that have had the greatest success in establishing property rights never quite live in the Republic of Pareto, but just pitch their tents in one of its proverbial suburbs. The Republic is like a rainbow whose arc we follow with varying degrees of success. Where is the pot of gold at the end? I suspect the answer to that question does not really matter. What matters is that we try to emulate the Republic and that through our efforts we strive to convert our antagonisms into something fruitful. That sort of peace is the real treasure we gain from believing in and working out the details of Pareto’s Republic.
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