The Political Economy of Democracy

[noel emits]

What I don't understand is who or what is going to ever be able to change the constitution (or whatever) so that it works automatically to incentivise those in power to work for the general good? If there was a body or person that had the power to change constitutions in such a way wouldn't that body also be more likely to work for its own good unless there was in turn some incentive for it to change constitutions in this way?

I picked that up from here:

Society does not have to wait for civic-minded leaders to improve citizen welfare, but it does have to construct institutions for growth that reflect the interests of leaders in securing political power. In too many instances, the institutional arrangements turn bad public policy into good politics.

So I suppose the key part in this argument would be this:

When leaders provide privileged acces to resources, they interfere with the efficient distribution through the market's decentralized decision making, weakening the economy and diminishing the total resources at a leaders disposal. Why leaders would knowingly choose policies that lead to economic decline is one the great conundrums that accounts for much of the world's poverty.

So then it hinges on persuading leaders that their interests might be better served by better serving the interests of the wider population. Which is funny because I could have sworn many other people have argued the same thing in other ways, they just don't necessarily believe that a 'free market' is the way to do that.

 

[noel emits]

The market's 'decentralised decision making' can't really be relied upon to provide people with what they really need or even want when the people and the market have been manipulated to fuck by those who believe they have an interest in doing so. It should be possible to show that the interests of the many is the interests of the few but I don't think this is the one.

Anyway I said I wouldn't talk about this - I'd need to read more directly I think to see what the assumptions are.

 

[vimothy]

What I don't understand is who or what is going to ever be able to change the constitution (or whatever) so that it works automatically to incentivise those in power to work for the general good? If there was a body or person that had the power to change constitutions in such a way wouldn't that body also be more likely to work for its own good unless there was in turn some incentive for it to change constitutions in this way?

OTM -- and this is basically the most important debate in development / economics today, IMO.

 

[vimothy]

What I mean is that 'goods' is not the only way to keep people on side. Intimidation and lies can work too. I dunno, this whole philosophy seems hopelessly corrupt to me. Nothing good can come of it, mark my words. Anyway I'll let you lot debate the finer points, if it starts to make more sense to me I'll get back to you.

Noel, it's two sides of the same coin. Private goods also includes an implicit threat that removal of support will result in the loss of those goods (e.g. the example of North Korea in the podcast).

 

[Mr BoShambles]

What I don't understand is who or what is going to ever be able to change the constitution (or whatever) so that it works automatically to incentivise those in power to work for the general good? If there was a body or person that had the power to change constitutions in such a way wouldn't that body also be more likely to work for its own good unless there was in turn some incentive for it to change constitutions in this way?

OTM -- and this is basically the most important debate in development / economics today, IMO.

Rich, i think the last couple of paragraphs at the end of this post should shed some light on your questions. But first I just want to try and explain some of the basic concepts of the institutional approach to political economy to try and make it all a bit clearer (or perhaps just complicate matters further ).

So what is that is that creates the incentives and constraints which govern human interaction? The answer (at least according to this model of political economy) is INSTITUTIONS.

What are institutions? The definition provided by Douglass North - one of the founding fathers of New Institutional Economics - is:

Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding economic change. ​

North differentiates between what he terms ‘formal’ and ‘informal’ institutions; the former tend to be explicit rules embodied in law or constitution, while the latter tend to be implicit codes of conduct and norms of behaviour embodied in custom and tradition.

Furthermore North draws a vital distinction between institutions as ‘the rules’ and organizations defined as ‘groups of individuals bound together by some common purpose to achieve objectives.’ Thus bodies which are commonly referred to as institutions such as the World Bank and International Monetary Fund (IMF) are, by this definition, considered to be organizations, as are States, firms and all manner of social bodies.

Laws, norms and codes of conduct evolve to regularise patterns of human interaction in order to promote stability and reduce the uncertainty of outcomes. The functionality of any given institutional arrangement requires a set of enforcement mechanisms – a system of formal and informal punishments – which ensure that actors, on the whole, adhere to the rules.

Such constraints on behaviour limit the opportunity set available to actors and define the relative rewards they can expect for exploiting these opportunities. These rewards, which North terms the ‘pay-off structure’, in turn affects the types of organizations which evolve within the society in question. Particularly important in this regard are the formal economic institutions governing property rights and the enforcement of contracts. If these formal institutions are weak and as a consequence the greatest pay-offs are made to rent-seeking behaviour, then organizations are likely to cultivate such opportunities (for instance expropriation of property, exclusive monopoly privileges, and the like). By contrast, if property rights and contract enforcement are well protected then the highest returns will go to organizations engaging in productive activities. If the latter is the case then ‘we will expect organizations to devote resources to investing in skill and knowledge that will increase productivity.’ Thus, it becomes clear that the institutional structure of a society is a key determinant in its economic performance. The incentives offered by this structure influence both the way in which resources are distributed and the way in which they are used.

What is missing from this analysis is an account of the factors which underlie continuity and change within the institutional structure of any given society. Developing an understanding of this requires an examination of the complex interplay between beliefs and power in shaping institutions. The cultural beliefs of a society - its norms, values and ideas governing interaction - are transmitted from one generation to the next as a form of acquired knowledge. For this reason, North maintains that cultural heritage – or ‘path dependency’ - explains the relative continuity of societies through time and acts as a powerful impediment to radical change. Such continuity occurs because informal institutions provide a historically accumulated framework which is not typically amenable to deliberate human manipulation. Furthermore, since organizations (which include the State apparatus don't forget) emerge to take advantage of the opportunity set provided by the institutional framework, they have a vested interest in preventing any alteration to the framework that threatens their survival.

Therefore, it must be recognised that institutional change is a two-tiered process. Changes in the formal rules of a society can be achieved relatively quickly and easily through decisions taken by those who hold political power. However, such changes are likely to occur only if they are perceived by the existing elites to be incentive-compatible with their interests. By contrast, informal constraints, due to their embedded nature in custom and tradition, cannot be altered in the same top-down manner. Therefore, as a rule, societies change by building on and modifying their existing institutional structures rather than radically reversing their direction overnight; and thus ‘the huge variation in the world today in both economic and political outcomes is the result of long-run historical processes.’

 

[Mr BoShambles]

So from this 'institutional perspective', human interaction is embedded in the institutional arrangements of society. Furthermore these arrangements are a key, if not the key, determinant of political and economic performance.

They are crucial in understanding the causes behind the divergent levels of prosperity amongst states in the international system today. Some societies (like those of Western Europe, North America and parts of East Asia) have evolved institutional frameworks which facilitate widespread impersonal cooperation and exchange, encourage high levels of investment in productive activities, and allow dynamic change without inducing instability and civil-war. This has led them on a path to self-sustaining economic growth and the creation of unprecedented levels of wealth within their territorial boundaries. However these 'developed countries' are the exception, not the rule. According to Mary Shirley (an expert on 'institutions and development') the picture is very different in most contemporary societies:

The vast majority of humans today live in countries that have failed to create or sustain strong institutions to foster [impersonal] exchange and protect property. Individuals in these countries enforce most bargains using informal mechanisms - private armies; threats to reputation; ostracism from kinship, ethnic, or other networks, or the like – and they have little trust in or trade with people not subject to these mechanisms. The state is either too weak to prevent theft of property by private actors, or so strong that the state itself threatens property rights. In either case, entrepreneurs and organizations face a high risk that they will not be able to realize a return if they invest in specific knowledge, skills, or capital, so they refrain from investment, productivity is low, and the economy stagnates.​

Therefore it seems clear that the process of economic development necessarily entails a transition from a situation where exchange is primarily limited to personal networks, to one where impersonal exchange becomes commonplace. For such a transition to occur, the institutions of a given society must evolve to offer increased trust and certainty surrounding contract enforcement. Furthermore the property rights of the masses must be protected against expropriation, both from other private actors and from the State itself. However, as suggested in the my previous post, the possibility of such changes occuring is severely hindered by both (1) the vested interests of powerful economic and political actors; and (2) by the prevailing beliefs and norms which underpin the existing status quo. Evidently, progressive institutional reform can take place, as witnessed for example in Western Europe and parts of the Far East. But Mary Shirley argues that such a process is both arduous and lengthy:

The robust institutions that support modern market economies emerged through a process of adaptation that apparently cannot easily be shortened or emulated. Even when manifestly harmful to economic growth and human welfare, embedded institutions usually change slowly, if at all. If these conclusions seem pessimistic, it may be the result of our current ignorance about institutions and development.​

 

[nomadologist]

What I don't understand is who or what is going to ever be able to change the constitution (or whatever) so that it works automatically to incentivise those in power to work for the general good? If there was a body or person that had the power to change constitutions in such a way wouldn't that body also be more likely to work for its own good unless there was in turn some incentive for it to change constitutions in this way?

There is a body that can change the Constitution of the U.S.--it's called Congress. And yes, I would say that the Congress often operates in the best interest of lobbyist groups that pay them off and fund campaigns. [viz their own interests]

 

[Mr BoShambles]

There is a body that can change the Constitution of the U.S.--it's called Congress. And yes, I would say that the Congress often operates in the best interest of lobbyist groups that pay them off and fund campaigns. [viz their own interests]

I would agree; your assertion doesn't run contrary to Bueno de Mesquita's framework of analysis. Interest groups (i.e certain corporate elites etc) often form part of the winning coalition - they fund campaigns and in return expect paybacks.

No one is defending this situation (i don't think), not me, not Vim, not Mesquita. But it happens.

However the institutional political arrangements in the US are setup to ensure that the government cannot be completely bought out by certain priviliged groups as happens elsewhere in the world. There are checks and balances. The US government, despite its affiliation to whatever corporate interests (which clearly vary through time), always has to provide significant public goods. It cannot get away with not doing so! The electorate would not stand by and watch the government give the majority of its resources as private goods to its cronies while spending nothing on the maintainance of infrastructure, education etc.

 

[noel emits]

The electorate would not stand by and watch the government give the majority of its resources as private goods to its cronies while spending nothing on the maintainance of infrastructure, education etc.

Some would say they get away with exactly that (be interesting to see how 'defense' expenditure on phony wars compares to education and public services for instance, also where that money actually goes...). It has even been mooted that the electorate itself may not be quite as electoral as an electorate should be but that's another matter.

 

[Mr BoShambles]

Some would say they get away with exactly that (be interesting to see how 'defense' expenditure on phony wars compares to education and public services for instance, also where that money actually goes...). It has even been mooted that the electorate itself may not be quite as electoral as an electorate should be but that's another matter.

Its all a matter of scale though Noel.

Compare the situation in the US to that in Chad (as outlined bv Paul Collier in one of my earlier posts in this thread). What percentage of the resources available to the (democratic) US govt are spent on education and other infrastructural goods compared to private kickbacks? A large percentage of US tax-payers money is spent on public goods. Also, although you may disagree, military spending is not automatically bad i.e. if its designed to ensure the safety of US citizens from external threats. Security is a public good.

In contrast the (autocratic) govt of Chad spends virtually nothing on education or other public goods and instead most goes on private goods and the military - but in this case the military spending is used to secure the regime from internal threats and thus is used to repress any political opposition (and often the citizens themselves in the process).

And whatever you may think about the electorate in the US, better an electoral system with checks and balances than none at all. At least IMO. Surely you (or the average US citizen) would not rather have an autocratic govt chosen by a small elite with no mandate from the people?

 

[noel emits]

Of course, in theory. Just worth thinking about the many ways that such checks and balances can end up being undermined and circumvented. I think governments like those in the US and the UK are certainly more sophisticated in terms of disguising the extent of their corruption.

I suppose the point to build on here is that having a relatively healthy, educated and free population can be shown to be beneficial to the overall economy. Seems a bit arse about face in terms of values but there you go.

 

[Mr BoShambles]

Of course, in theory. Just worth thinking about the many ways that such checks and balances can end up being undermined and circumvented. I think governments like those in the US and the UK are certainly more sophisticated in terms of disguising the extent of their corruption.

I don't necessarily disagree but would you care to elaborate?

 

[Mr BoShambles]

I suppose the point to build on here is that having a relatively healthy, educated and free population can be shown to be beneficial to the overall economy. Seems a bit arse about face in terms of values but there you go.

Don't really follow. This goes without saying right.

Making the transition from a society with institutional arrangements which perpetuate corruption, low public spending, exchange predicated on personal networks (ethnic group, tribe, blood-ties etc), economic stagnancy... Well its fucking difficult for all the reasons outlined above.

What do you think of the institutional approach I've laid out drawn from the works of North and Shirley?

 

[noel emits]

I don't necessarily disagree but would you care to elaborate?

I realise it's not too helpful to talk in such general terms. Of course part of the difficulty is that all we can talk about with any accuracy or agreement is 'visible' and legitimate government activities. I would say that it's also a matter of scale in those terms - there's more wealth to go around in 'developed' countries so there's more scope for extracting wealth from the country. It may not be such a large percentage but it's way more in terms of capital. And if you can do it without the people noticing, even get them to agree voluntarily, that's sophistication.

 

[nomadologist]

Some would say they get away with exactly that (be interesting to see how 'defense' expenditure on phony wars compares to education and public services for instance, also where that money actually goes...). It has even been mooted that the electorate itself may not be quite as electoral as an electorate should be but that's another matter.

Yeah, exactly--a good example of them doing "exactly that" is this war we're wasting billions of dollars on every month while the school systems rot.

 

[IdleRich]

"There is a body that can change the Constitution of the U.S.--it's called Congress. And yes, I would say that the Congress often operates in the best interest of lobbyist groups that pay them off and fund campaigns"

Exactly.

"The robust institutions that support modern market economies emerged through a process of adaptation that apparently cannot easily be shortened or emulated. Even when manifestly harmful to economic growth and human welfare, embedded institutions usually change slowly, if at all. If these conclusions seem pessimistic, it may be the result of our current ignorance about institutions and development."

And what's to cause them to change? And if they do change what will make them change in the "right"* direction?
What I mean, it doesn't seem that radical to say "people tend to act in their own best interests even when they're in government" and that "human nature" thus provides problems for any system of government you propose - the question is what to do about that isn't it?

*Not that I necessarily agree with you about, or would even claim to know, what the right direction is.

 

[Mr BoShambles]

*Not that I necessarily agree with you about, or would even claim to know, what the right direction is.

The right direction is clearly one in which the institutional arrangement of society becomes configured to providing economic growth and enhancing human welfare. This transition problem which blights most (if not all) of Africa, Latin America and much of Asia is the most important debate in development/economics today. Bad institutions are what creates self-perpetuating poverty, and I'm sure we can all agree that the suffering of billions around the world is a human tragedy.

There is no one-size-fits-all solution to this problem. What occured in the 'West' cannot be easily emulated (according to Shirley's theory - which is bourne out in practice as well) and nor should this necessarily be desirable either. The successful East Asian societies (the so-called 'Tiger Economies') have found their own path of institutional change which has led them to prosperity, yet in some key respects it is markedly different to the path adopted in the 'West' (which occurred remember over centuries - I doubt very much that quick-fix solutions can be found). Each society starts from a different point, with a different cultural heritage and thus a different institutional endowment. Therefore development must be country specific.

I stand by this though:

It seems clear that the process of economic development necessarily entails a transition from a situation where exchange is primarily limited to personal networks, to one where impersonal exchange becomes commonplace. For such a transition to occur, the institutions of a given society must evolve to offer increased trust and certainty surrounding contract enforcement. Furthermore the property rights of the masses must be protected against expropriation, both from other private actors and from the State itself. However, as suggested in the my previous post, the possibility of such changes occuring is severely hindered by both (1) the vested interests of powerful economic and political actors; and (2) by the prevailing beliefs and norms which underpin the existing status quo.

 

[nomadologist]

Exactly.


And what's to cause them to change? And if they do change what will make them change in the "right"* direction?
What I mean, it doesn't seem that radical to say "people tend to act in their own best interests even when they're in government" and that "human nature" thus provides problems for any system of government you propose - the question is what to do about that isn't it?

*Not that I necessarily agree with you about, or would even claim to know, what the right direction is.

Right, I agree--doesn't seem all that radical. The institutional basis of change idea is interesting to me, but I fail to see how even institutions escape the sort of concerns that the selectorate and winning coalition do, mainly the status quo. And it looks like Mr. BoShambles admits that this is an agent against institutional change, so to speak.

 

[vimothy]

Right, I agree--doesn't seem all that radical. The institutional basis of change idea is interesting to me, but I fail to see how even institutions escape the sort of concerns that the selectorate and winning coalition do, mainly the status quo. And it looks like Mr. BoShambles admits that this is an agent against institutional change, so to speak.

Because "institutions", in this context, refers to rule-sets, not organisations.

The US constitution = institution
The US electoral college = political organisation

Any given organisation might be an instrument of institutional change. And it might be either good or bad, depending on your perspective.

 

[IdleRich]

"Any given organisation might be an instrument of institutional change. And it might be either good or bad, depending on your perspective."

But it will act according to its own best interests though - that's what you're saying right? - so any improvement would be purely coincidental.... unless the rule-set it is working within was already set-up to incentivise it to make a better rule-set.... but why would it be, being as how it was set-up by self-interested organisations (and so on and so forth)?