27 January 2012

Filip Palda's "Pareto's Republic and the New Science of Peace"

The PPE workshop today had Filip Palada presenting his book Pareto's Republic and the New Science of Peace. Palada's main concern is with the process that creates more efficient institutions and he notes that it's not an accident that better institutions seem to be associated with more peaceful states of affairs (not just less war but also less private violence). He noted that secure property rights in an evironment of rule of law are key, but he didn't give an answer as to what factors lead to such a system. Here are some of my thoughts on it.

First of all, Peter Leesom is right that the book should be called The Kaldor-Hicks Republic, as that is the concept of efficiency he seems to be using when he's assessing whether a set of institutions is better than another. This detail aside...

There were lots of discussions about how dictators and their cronies could be compensated such that they would agree to leave (compensation + a changed regime being better than no compensation + the regime). Peter Boettke mentioned that this is virtually impossible to do due to the problem of credible commitment: How would you assure the dictators and their cronies that they would really get to keep the promised goodies after they agree to leave? The amount of money necessary to compensate them for this risk is simply too much. So, the alternative is similar to what has happened in post-communist transitions: the former nomenklatura still maintains some power and the wealth that comes with it.

Of course there's also a different kind of compensation possible: You can tell them, "if you agree to leave, we agree not to kill you". I assume Gadhafi would have been wise to take such a bargain while it was still possible. This hints to what I think is missing in Palada's approach: what ultimately determines the changes in institutions is the power struggle between different actors. Formal institutions can be seen as tools used by those with a position of power to try to secure their position and the associated rents. Culture, while posing some constraints (how much bullying are people willing to take?), is not that important because people adapt to whatever the institutional environment happens to be, i.e. culture changes to reflect what's prudent to do at the individual level within the given institutional setting (more or less e.g. why don't North Koreans have more of a Guns of Brixton mentality, while the Tibetans seem to do). So, if you want to understand the way institutions change you have to track the power struggles and what factors (such as technology or international forces) change the balances of power.

It is often said that violence should be the means of last resort. For example, in the Revolt of the Masses Ortega y Gasset defined the degree of civilization of a society as the number of options or methods available in that society for solving conflicts before resorting to violence. In practice however, violence is usually the means of first resort. The microeconomics of this is something along those lines: if you are much more powerful than me, you face a very strong temptation to just take my stuff or bully me into some sort of exchange that is disadvantageous for me (and with which I wouldn't have agreed under non-threatening conditions). Morality may offer some restrained to the possible bully, but this is not a reliable long-term solution because the immoral have larger gains compared to the moral and thus gradually take over.

Consequently, an environment of (quasi-)voluntary exchanges is the result of a balance of power. Olson's story about the fact that stationary bandits (aka governments) win over roving bandits is along these lines, and this story seems to have a pretty good historical basis (see the 'From Egalitarism to Kleptocracy' chapter in Guns, Germs, and Steel).

I would say that it is even impossible to define what a voluntary exchange is, if the two agents are not of similar power. This is because violence has two uses: (1) one is predation of the powerful over the weak, (2) the other is enforcement of contracts and agreements. If you do me a service based on my promise that I would give you some money (or service) at a later date, what prevents me from abandoning my promise is the credible threat of what would happen to me if I don't deliver my part of the deal. But that threat is credible only if it is made by someone sufficiently more powerful than me (or by the possibility of lost future revenues via some reputation mechanism - like the eBay or Amazon ratings systems). The problem is that, if the deal was made with such a much more powerful agent, what assures us that the deal really was voluntary? After all, it would have been awfully generous of such an agent to restrain himself and not bully me into “agreeing” to a disadvantageous exchange. In other words, if the agreement is between two agents of very unequal power, there is no way to tell whether the powerful agent uses violence for predation or for enforcement. Thus, under such conditions, the very distinction between voluntary and involuntary agreements disappears (at least if you agree that a distinction exists only if it can be measured).

This means that we can talk of voluntary exchanges only when the two parties are of similar power, and there is a third party enforcer (either an agent such as a government or a network such as the reputation networks on eBay or Amazon) who is much stronger than the two. This also means that if the third party enforcer is a specified agent, there can be no real voluntary agreements between a normal agent and this much stronger enforcer. I.e. there is no such thing as a voluntary contract with the government (because there's nothing you can do if the government doesn't comply with its contractual obligations - see the current "debts restructuring" discussions in which private banks lose tons of money as states no longer pay them back - and nothing you can do if the government decides to attach some obligations to you that you don't really like and for which you are not compensated - e.g. mandated health insurance). It also means that there can be no such thing as anarcho-capitalism as it is normally construed – i.e. assuming contracts between normal people and protection agencies much stronger than them (because he who has the power to protect you, also has the power to abuse you, regardless of whether that “protector” is state or private).

So, to answer Palada's dilemma about what can be done to improve the institutional settings and increase peace, we need to focus on the way various power centers constrain each other. This is of course a very old and good idea: the concept of checks-and-balances and of federalism. But what factors lead to better checks and balances and create a larger safe space in which voluntary agreements can happen?

One way to think about it, not necessarily the best, is the Rothbardian theory of history, which assumes there are cycles of power losses due to authorities being taken by surprise by certain technological inventions that (temporarily) empower the weak. E.g. the invention of the printing press undermined the power structure, but eventually the invention was captured by government – the modern bureaucratic state would not have been possible without printing. The industrial revolution and the emergence of cities undermined the power of the land-owning aristocracy, but eventually capitalism morphed into the modern neomercantilist system as the new capitalist elites found the state useful as well. Radio was quickly captured by the state as the EM spectrum was nationalized, and it was effectively used for propaganda by the Nazi and fascist regimes. Now the internet has taken governments by surprise, and they are currently working hard to get back some sort of control (e.g. think SOPA/PIPA and ACTA).

So, from this perspective, the only truly exogenous factor is technology (in the sense that it generates surprises with wide-spread and unpredictable consequences for the existing power structure). Institutions and culture are endogenous: institutions are tools used by the current elites for (attempting) to maintain control and preserve their rents, and culture is more of an effect than a cause (i.e. culture understood from an act utilitarian point of view, and being driven by whatever is prudent for individuals to do in a given context, while somewhat constrained by our biological moral sentiments, such altruistic punishment etc.).