by Ober, Josiah
Along with providing citizens, and at least certain noncitizens, with institutionalized security against arbitrary expropriation, some Greek states encouraged investment by citizens in learning skills relevant to the provision of valuable public goods, notably security and public services (e.g., clean water, drainage, reliable coinage, honest market officials) that conduce to the general welfare. Public goods benefited all citizens, and in, some cases, all members of the community.29 In Athenian-style Greek democracies, incentives, in the form of pay and honors, were offered for providing public goods through public service. The opportunity to perform public service was made readily available to all citizens by opening access to decision-making assemblies and by the use of the lot for selection of most magistrates and all jurors. At Athens, by the fifth and fourth centuries BCE, incentives included pay for service as a magistrate, a juror, or an assemblyman. Incentives offered to citizens who gained the skills necessary to be an effective provider of public goods included not only pay but also honors and sanctions. Those individuals whose service was deemed especially valuable by the community were rewarded with public proclamations and honorary crowns. Those whose service fell short, on the other hand, faced the potential of both legal punishment and social opprobrium.30
A third set of rule-egalitarian incentives for human capital investment came in the form of institutions that limited certain forms of individual risk.31 All things being equal, people are more likely to make capital investments with potential upside benefits when the risk of downside loss is limited. Suppose, for example, that I am a subsistence farmer; my family has a median income that translates into 5.5 L of wheat per day: i.e., 1.6 × basic subsistence (see ch. 4). I have the opportunity to take on a potentially lucrative new enterprise, but only if I invest in myself and/or members of my family learning some new skill. I have reason to believe that there is a good chance that the enterprise will be successful and if it is successful, it will elevate my family to the relatively greater security of middling status (say, an income of 3 × basic subsistence). But the new enterprise means less time spent on Subsistence farming. If there is a realistic risk that the failure of the new enterprise will leave my family beneath the level of subsistence (i.e., threatened with annihilation), I am unlikely to take on the new enterprise. If, however, I believe that the worst that can happen is that my family will fall to say, 1.3 × the level of subsistence (we will consume less but will not starve), I am more likely to take on the new enterprise.
Likewise, if a non-elite family knows that its own resources are its only protection against famine, accidents resulting in loss of working capacity, or death of the head of family in war, the required risk-buffering strategies usually preclude capital investments that offer potential long-term gains. Along with the high rents imposed by landlords and rulers, the high cost of private risk insurance is a structural impediment to the growth of most premodern economies.
State institutions that insure citizens against potentially catastrophic losses may enable individuals and families to invest more capital in enterprises with the potential for increasing individual welfare. Such policies raise the specter of moral hazard—that is, privatizing the gains of risk-seeking by distributing profits to the risk taker, while socializing losses by requiring others to pay for gambles that fail. But if a risk-limiting insurance institution is properly designed (i.e., part of the loss is borne by the risk taker), it serves an equalizing function that may have the effect of increasing aggregate welfare. Aggregate welfare is promoted because the state, unlike a single family, can spread risk of crippling accident or death in war across a large pool and can stabilize food prices in the face of local crop failure by encouraging imports from distant markets and by diplomatic agreements with producer-states. Getting the overall institutional design right is no simple task. But if the design challenge is met, the playing field is leveled because, for the poor, the stakes of embarking on a path of attempted self-improvement are lowered from potential disaster to survivable loss. And so the poor family can reasonably afford to take a risk that would previously have been open only to a wealthier family.
Assuming (as we have in the hypothetical scenario sketched above) that high-benefit enterprises are readily available and that the chances of success are better than even, the right policies, over time, lead to more people advancing from relative poverty to middling status. Although some risk takers will suffer losses, and so their families will be poorer, and some producers will be negatively affected by paying higher taxes, the net effect is positive for overall economic growth. Greek “public insurance” institutions (best documented for Athens, but not unique to Athens) included grain price stabilization and subsidization (reducing the risk of famine), welfare provisions for invalids (reducing the risk of loss of work capacity), and state-supported upbringing of war orphans (reducing the risk of military service by heads of families). Finding the right balance, such that the rules allowed risk-taking without inflating moral hazard, and such that the incentives of producers were not dampened by excessively heavy taxation, was a matter of institutional innovation and experimentation. We look at how public insurance institutions were developed and how they worked in practice in chapters 9 and 11.32
Examples of economically valuable individual human capital investments in the Greek (and a fortiori Athenian) world that could plausibly have been promoted by rule equality include literacy, numeracy, and mastery of banking and credit instruments. Other, perhaps less obvious, investments in human capital included military training, mastering various aspects of polis governance (e.g., rhetoric and public speaking, public finance, civil and criminal law), and individual efforts to build bridges across localized and inward-looking social networks.33
Another centrally important determinant of economic performance is the cost of exchanging goods and services. Voluntary transactions enhance social welfare insofar as they benefit both parties to the exchange (without harming others), that is, insofar as each party fares better than if the transaction had not taken place. Under such conditions, the more transactions that are undertaken, and the greater the benefit to each party, the better the economy performs as a whole. All things being equal, the more it costs each party to undertake a transaction relative to the expected benefits, the less likely it is that a mutually beneficial transaction will take place. So, once again holding all other factors steady, higher transaction costs depress economic growth; lowering transaction costs, by the same token, promotes growth.34
Rule egalitarianism can be a major factor in lowering transaction costs because inequality, in respect to access to information relevant to a transaction, or in respect to access to and fair treatment within the institutions potentially affecting a transaction, drives up transaction costs. Relevant sorts of information include, for example, the laws governing market exchanges; weights, measures, and quality standards; and the reliability of the currency in circulation. Institutions relevant to transaction costs include property rights, contracts, and dispute resolution procedures.
In the case of unequal access to information or to fair institutions, the disadvantaged party must raise the price of the goods or services in question to discount for the missing information or lack of institutional support. As the price goes up to cover these “inequality costs,” the benefit of the exchange to the other party drops accordingly. And thus, either the transaction between the parties is carried out with less aggregate benefit, or it fails because no mutually beneficial price could be arrived at. In the opposite situation, where information and access to fair institutions are more equal, transaction costs are lower and thus economic growth is (at least potentially) higher. As the political scientists Douglass North, John Wallis, and Barry Weingast demonstrate, the high transaction-cost, access-limiting social order that they call the “natural state” is historically common. Such societies can be stable, but they tend to be economically unproductive relative to societies characterized by more open access to information and insti
tutions.35
Relatively egalitarian institutional regimes, like those of Greek city-states, ought, according to the transaction-cost argument sketched here, to be (all else being constant) more economically productive than rule-inegalitarian regimes. Moreover, the transaction-cost benefit ought to increase if access is made more equal over time. In fact, Greek weights and measures were standardized in several widely adopted systems in the archaic and classical periods (chs. 6–9). In the case of democratic Athens, access to information and institutions did become somewhat more open and equal as the laws were increasingly standardized (e.g., in the legal reforms of 410–400 BCE), better publicized (e.g., by being displayed epigraphically), and more efficiently archived (chs. 8–9). The Athenian state provided traders with free access to market officials and specialists in detecting fraudulent coins. Parties to certain commercial transactions were put on a more equal footing with the introduction of the special “commercial cases” in which resident foreigners, visitors, and probably even slaves had full legal standing. These developments are discussed in more detail in chapter 9.
COMPETITION, INNOVATION, AND RATIONAL COOPERATION
The second hypothesis for the wealth of classical Hellas is that economic growth was fostered by competition, innovation, and rational cooperation. innovation and cooperation were driven by competition. Competition among individuals to create more high-value goods and services and to provide more valued public goods (and to be compensated accordingly with pay and honors) was promoted by the even playing field created by fair rules equalizing access to institutions and information. Meanwhile, competition between states within the decentralized city-state ecology created incentives for cooperation among many individuals with shared identities and interests. Competition also promoted innovation in institutions faciliating interpersonal and interpolis cooperation. Innovation and cooperation, in the context of low transaction costs, encouraged interstate learning and borrowing of institutional best practices.
Continuous innovation is a primary driver of sustainable economic growth; the economist William Baumol emphasizes that societies dependent on stable regimes of rent extraction, rather than continuous innovation, face low and hard ceilings restricting growth. Today we often think of economically productive innovations as technological; improved energy capture (use of fossil fuels) was, for example, a major driver of the historically remarkable rates of economic growth enjoyed by some relatively highly developed countries in the nineteenth and twentieth centuries. Highly successful technological advances that spread quickly through the Greek world and beyond include the oil lamp, terra cotta roof tiles, and wine.36
Although the classical Greek world unquestionably benefited from these and other technological advances, technological development does not seem likely on the face of it to account adequately for the intensity and duration of the classical efflorescence. Technology is, however, only one domain in which continuous growth-positive innovation is possible. The Greek world was arguably a standout in its development of new public institutions that served to increase the level and value of social cooperation without resort to top-down command and control. Valuable institutional innovations were spurred by high levels of local and interstate competition, and they were spread by the circulation of information and learning.
Just as it is uncontroversial to say that the Greek world was, when compared to other premodern societies, comparatively egalitarian in its norms and formal rules, so too it is uncontroversial to say that the Greek world was characterized by high levels of competition. The competition among Greek communities could be a high-stakes affair, potentially ending in the loss of independence, loss of important material and psychic assets, or even annihilation. The high level of competition between rivals placed a premium on finding effective means, institutional and cultural, to build and to sustain intracommunity cooperation. One of the basic lessons that the fifth century BCE Greek historian and political theorist Thucydides offers his readers (positively in Pericles’ Funeral Oration in book 2, negatively in the Corcyra civil war narrative in book 3) is that communities capable of coordinating the actions of an extensive membership had a better chance to do well in high-stakes intercommunity competitions.37
Social institutions can provide both incentives for cooperation and mechanisms for facilitating coordination, and classical Greeks were well aware of this potential.38 One result of endemic Greek intercommunity competition was, therefore, a proclivity to value cooperation- and coordination-promoting institutional innovations: A state that succeeded in developing a more effective way to capture the benefits of cooperation across its population gained a corresponding competitive advantage vis-à-vis its local rivals. Notably, as has recently been demonstrated in detail, and contrary to the “standard modern premise,” in the classical era many Greeks (and a fortiori the Athenians) had freed themselves from “the grip of the past” in that they were quite willing to embrace the positive value of novelty in many domains.39
Greek communities readily learned from one another. Every new institutional innovation was tested in the competitive environment of the city-state ecology. Many innovations were presumably performance-neutral—that is, they had no significant effect on the community’s relative advantage in competitions with rivals. Other innovations would, over time, prove to be performance-negative. If, however, an innovation adopted by a given polis was believed to have enhanced that polis’ performance, there would be prima facie reason for other poleis to imitate it.
There were, of course, many reasons for polis B not to imitate polis A’s performance-positive institution. Most obviously, the new institution might be disruptive to polis B’s existing social equilibrium, a disruption that would, among other undesired outcomes, result in a net loss of cooperative capacity. Classical Sparta was a case in point. The Spartan social system was overall resistant to disruptive innovation, which proved a disadvantage in the early phases of the Peloponnesian War.40 Yet in other cases, the perceived chance to improve polis B’s performance, and thus do better relative to its rivals, would be a sufficient incentive to adopt polis A’s innovation. The Spartans eventually recognized the need to adapt; they did so by developing a substantial navy in the later phases of the Peloponnesian War (ch. 8).
Some innovations, such as the federal leagues of central Greece, were widely adopted across certain regions (ch. 9). Other highly successful innovations were adopted across the polis ecology. Widely (although never universally) adopted institutional innovations that we consider in the next chapters included coinage, euergetism, the “epigraphic habit,” diplomatic arrangements, theater, and cult.
Of course not all Greeks, and not all Greek communities, were equally innovative or equally willing to emulate successful innovations developed elsewhere. But the Greek world overall saw what appears to be a strikingly high level of institutional innovation and emulation across the ecology of states over the 500 years from the beginning of an age of expansion in about 800 BCE to the classical peak in the late fourth century. Major domains of institutional innovation, considered in the next five chapters, include citizenship, warfare, law, and federalism. In the domain of state governance, both democracy and oligarchy were especially hot areas of institutional innovation and interstate learning. And, ominously for the continued independence of the leading Greek poleis, interstate learning readily jumped from city-states to potentially predatory central-authority states, through the medium of highly mobile Greek experts. Several such states were developing quickly on the frontiers of the Greek world in the fourth century BCE, an era in which expert mobility seems to have reached new peaks.41
Within the city-state ecology, a regional hegemon might encourage or discourage adoption of a given institution. Oligarchical constitutions were required by Sparta of the ca. 150 states of the fifth century BCE Peloponnesian League (Thucydides 1.19). Meanwhile, in the later fifth century, Athens imposed monetary and weight standards on the 300+ states of the Athenian empire.42 Yet, as w
e have seen, there was no general central authority in the classical Greek city-state ecology to mandate when or how widely a given innovation was adopted across the ecology as a whole. The extended city-state environment thus operated as something approaching an open market for institutions. Opportunities for imitation were facilitated (transaction costs lowered) by the ease of communication across polis borders, which was in turn facilitated by the shared culture of the Greek world. Some impediments to institutional learning between modern nations, e.g., differences of language and religion, were much less salient in the Greek world.43 Because this “market in institutions” favored the development and dissemination of more effective modes of social cooperation, Hellas grew wealthier—and meanwhile, Hellenism grew increasingly attractive to some of Greece’s neighbors.44
PROSPECT
The “fair rules, capital investment, low transaction costs” and “competition, innovation, rational cooperation” hypotheses, taken together, suggest an explanation, not only for why Hellas grew wealthy through increased specialization, but also for the creative destruction of inefficient rule-inegalitarian institutions and for the high culture of the archaic and classical periods—the new and influential forms of art and architecture, literature, visual and performance art, and scientific and moral thought that so impressed Byron. The classical efflorescence is at least partially explained by the conjunction of deep investment in human and social capital, low transaction costs, continuous competitive innovation and rational cooperation—all of which increased incentives to specialize, exchange, and learn.