Week Two Class Notes

 Political and economic systems, Part 1

Countries differ in the political structures and institutions they employ and they also differ in their approach to endorsed or permitted economic systems. The fact is, these two structures are - in the long run - intimately related: so much so that we refer to political economy as the approach a nation takes reflects a particular perspective on the legitimate roles of state, market, and the individual. Put differently, we are concerned here about the conflicting desires of people to do well individually, to be a part of society and how these two desires are balanced. The problem is - how do we reconcile efficient production with a bearable society? In this discussion, we will examine some several concepts of the foundations of the nation-state as well as economic systems. As a primer for some of the historical elements of this inquiry, I request that you view Episode One of the Commanding Heights video, particularly Chapters 1 through 7.

Why is understanding this important? One reason is that the great change at the end of the 1980s led to the rejection of centrally planned economies and the embrace of market economies. With that, we saw many states attempt to move toward more democratic structures (a linkage we explore later). Still, there are many emerging/failed democracies/market based systems. What does this mean for the viability of international opportunities? What are the necessary conditions for success of democracy as a system?

Mandelbaum (in Democracy without America) argues the connection is a free market economy and its emphasis on property rights and the subsequent emergence of non-governmental civil institutions. I agree that property rights are a key to understanding a perspective on rights generally and the Liberal (in the traditional, not American contemporary, sense) notion of the state.

The nature and role of property

Famously, the Declaration of Independence says we have the inalienable right to "life, liberty and the pursuit of happiness". This is Jefferson's take on John Locke's earlier notion of "life, liberty, and estate (or property)". John Locke is probably the single most influential thinker for the founding fathers and even though Jefferson changed "property" to "pursuit", the original idea was restated in the Fifth Amendment (the Due Process amendment) which says we cannot be deprived of life, liberty, or property without such due process.

Locke's ideas on property begin with the notion that we have a right to our own bodies. If we do, then we have an extended right to the fruit of the labor of our bodies, particularly to the extent that we extract or convert from nature (that is, if we work, we have a right to the proceeds of that work. This has serious implications - we can't be forced to work for someone, nor can we be forced to surrender the proceeds of our work. Hence, slavery is morally untenable). Locke wrote that God gave the world to man in common and the conversion to private property is permitted if

  1. there is enough and as good left in common for others
  2. it is not wasted or allowed to spoil
  3. (as regards land) it is improved

Thus, our right to ourselves is extended to the ownership of improved land - that is, the labor that we put into that land makes it ours (if the fruit so our labor cannot be appropriated, then improved land, one such fruit, is protected). Locke therefore argued that the fundamental role of government is the protection of private property -especially since those rights such as life and liberty can quite clearly be construed as property rights!

In counter argument, Pierre-Joseph Proudhon argued that because the world was in common, appropriation of any part leads to: "property is theft" which meant that (private) property is illegitimate - that there is no moral justification for the existence of private property, and that private property therefore represents a sort of "theft" from the common property of all mankind. Motivation here is inequities in wealth, power, and control - the existence of poverty, the exploitation of some (particularly laborers) by others (the owners of the factors of production). Thus, no one is more entitled to resources of the world than any other (e.g., land) - we hold them collectively, therefore use should be a collective decision.

    • Is this so alien a view? Are there more modern critiques of property rights? What about patents? Are they fair?
    • Henry George, an American philosopher, has a very interesting third approach that emphasizes the ultimate communality of land.

These conflicts over the idea of property or the ownership of productive assets and how they are used is the focal point of most governmental systems (and cultural systems too!). State/political systems are ways of making concrete the philosophy of property. German sociologist Max Weber described the state as the set of institutions that link public authority and society or the "administrative and legal order". The institutions and political systems - states -  range from stressing the primacy of collective well-being and objectives to stressing the primacy of individual objectives.

Collective systems argue that a greater social good requires the constraint of individual rights/freedom to the extent that the exercise of those rights runs counter to the larger scale good. In other words, citizens (are compelled to) work toward a social good or goal rather than their own benefit (if their perception of that differs) -and, as Hayek notes, this is inevitable. Individual property rights tend to be weaker in collective regimes (if they exist much at all). One reason is that pursuit and acquisition of private property is almost always asymmetric - some get it and some don't. Ultimately, this leads to strata or levels in a society. Many communal theorists argue that this outcome is unfair, unjust, or unethical - hence, we should be enlightened enough to conceive of objectives that supersede the desires (or greed) of the individual (material egalitarianism). Specifically, a society is better off if all are equal in outcome. The role of the state is to create this end - which requires some control over the resources to achieve it.

Obviously, this seems quite at odds to Locke's notion - even the very primary premises such as the right to one's self and the labor thereof. The collective state typically says that private property is wrong because "private" partitions from the communal - a very Proudhon concept. Hence we have seen the efforts of Russia, China, Eastern bloc, Cuba, etc. to communalize property.

The individualist state says much the opposite - the objectives of the one are more important than the collective or the state. In Road to Serfdom, Friedrich Hayek notes that in individualist states, we can have common objectives but this occurs only as a "coincidence of private ends".  In the individualist state, property rights (i.e., the right to choose how to deploy resources and to what end) are key. Governments exist (or should exist) at whatever minimal level is required to assure the protection of those rights, much as in Smith's framework. Alternatively expressed, these states focus on equal opportunity rather than equal outcome.

The political structures that emerge from this are well-known. Collectivist states tend to be totalitarian or authoritarian. Why is this? First, the idea of a dominating social good means that somebody has to decide what that good is AND orient the tools of state to pursue that goal. Dissent and the exercise of rights contra the social objective are disruptive - hence, these collectivist philosophies tend to be expressed through authoritarian states  - rights are not universal. More to the point, totalitarian states emerge when someone can gain enough power to implement a particular vision of society  - and this means controlling the structures and institutions. Other forms of totalitarianism include:

  • Theocratic totalitarianism (what role for rights here?)
  • Tribal totalitarianism (family versus religion, but much the same)
  • Right wing totalitarianism - i.e., fascism

States that emphasize individual rights (i.e., protect individual property rights) tend to be more or less republic/democratic in structure because that is how those rights are voiced. Specifically, individualist states should have strong limits to the role/power of government. What is a truly democratic state? What are the guiding characteristics? Elected officials, free, fair, and frequent elections, freedom of expression and association, and alternative sources of information. Elaborating on these issues is one of the Discussion topics.

This is not to say that democratic states do not have collectivist objectives. As Smith observed, the state should provide certain public goods such as defense - and other institutions or instruments we cannot do individually. Examples: Social security and related programs, National Parks, FDA, FCC. We have also seen the rise and fall of social democracies - i.e., those where key factors of production or key services are controlled by the state (think Britain post WWII or Sweden) - though, generally, these experiments have been less than successful.

Economic systems

We distinguish between these two economic approaches as Market and Command Economies - and in between, there usually exists something called a mixed economy. Market Economies subscribe to the idea that the market is the most efficient allocator of inputs and outputs through the price mechanism. That is, price emerges from the interaction of supply and demand and signals to buyers and sellers what they should do to maximize their own welfare. In a truly Lockean way, people can decide how to expend the capital they own (themselves, their labor, and their assets) to do the best they can. One of the keys to the price system is that it is win-win (barring monopoly). That is, if you buy or sell something, it is because you think the price is fair or fair enough what for you get. In other words, both parties to the exchange are better off. The macro level manifestation of this is the market of supply and demand. This is Smith's "invisible hand "at work. The most important implication here is that no one decides about production outputs at the state level.

Command economies dictate what goods and services are to be produced and at what price - based on the premise that resources should be allocated to the good of society. This has a certain appeal - don't most of us think that there are things in the market that have little reason to be there? That seem superfluous or trivial - and yet resources are dedicated to them? Still, command economies are notoriously poor at performing for several reasons.

When the state owns the means and the profits/productivity is not shared by those who do the work, then there is little motivation to do well (you might see this in the example of the facilities at Norilsk in the Commanding Heights video). Similarly, there is little motivation to invest in/care for those means of production. Moreover, predicting what the economy will need is just too difficult. It requires perfect foresight over near infinite detail. When gaps between the plan and demand emerge, they get filled by black marketing, which undermines the entire system. Finally, when property rights are immaterial - what happens to investment? To growth?

Assessing the logical connections between political and economic systems is the objective of Discussion topic 2.

Additional readings, if you want to pursue further:

The Politics of Market Socialism.

By: Shleifer, Andrei; Vishny, Robert W. Journal of Economic Perspectives, Spring 94, Vol. 8 Issue 2, p165 (AN 9407014390)

Spreading democracy.

By: Hobsbawm, Eric J. Foreign Policy, Sep/Oct 2004 Issue 144, p40 (AN 14276519)

The papers:
Why Democracies Excel claims that the "development first/democracy to follow" model actually reinforces poverty and that countries that lead with democratic institution development actually outperform autocracies. Perhaps - the methodology does not clearly establish economic system or any sense of what came first. However, very key element here is the "Conceptual Underpinnings" of democracy - which they describe as institutions that encourage power sharing/transparency.
They cite:
  1. System of checks and balances in branches of governance - in other words, the branches are legitimate and have power/authority - and limits on them
  2. Free information flow - multiple sources (not just governmental bodies or proxies)
  3. Openness and transparency  - a check on corruption
  4. Legitimacy of the rule of law and an organized succession: Valerie Bunce (a political scientist) has described these attributes as: certain procedures with uncertain results.  Friedrich Hayek comments: "Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observation in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that the government in all its actions is bound by rules fixed and announced beforehand - rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one's individual affairs on the basis of that knowledge".

However, these institutions are historically rare. So, what are the factors that help these emerge? This is what the Democracy w/o America paper addresses.

DWA claims that democracy is actually a fusion of popular sovereignty and liberty traditions. Popular sovereignty is relatively recent and it is interesting to observe how dimly it as viewed especially as it leads to "tyranny of the majority". Liberty is older by far and far more difficult to achieve. Note the conditions on p 3 - liberty requires institutions:  legislatures, bureaucracies,  legal systems (the governance systems) PLUS values that make these important and valuable. Author claims that the minimum time to create social conditions conducive to liberty (viz., functioning institutions) is a generation - so how does this happen in the face of opposition?

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