North and Weingast
By Arnold Kling
Economic conferences rarely produce great papers. Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies, a conference dedicated to the work of William Baumol, is typically pedestrian, with particularly forgettable contributions from Kenneth Arrow and Robert Solow.
However, there are a couple of good essays. Douglass North writes,
Realizing the potential of human well-being possible with scientific knowledge entails…an incentive structure that rewards productive activity and discourages antisocial behavior in the specific setting of impersonal markets, both political and economic. But the necessary institutional changes to create such an incentive framework must overcome the innate genetic predisposition that evolved with a hunter/gatherer environment.
The way I would put this is that we need to learn to reward and punish behavior rather than tribal membership. Or, to put it another way, we need to apply tribal inclusion/exclusion habits to people on the basis of their conduct rather than on their appearance or kinship.
Barry Weingast writes,
all successful constitutions lower the stakes of politics…constitutions that protect what citizens hold dear are more likely to survive.
Weingast’s offers two principles of successful constitutions.He writes,
…First, they typically impose a range of familiar restrictions on governmental decision-making…
…Second, the constitution must provide a mechanism by which these provisions are enforced…
…[This] requires the construction of a focal solution, typically through a pact, which is an agreement among contending elites who compromise over the form of the political rules and citizens’ rights…
To be self-enforcing, a pact must meet four conditions…
1. it must create structure-and-process focal solutions…
2. it must make all parties to the pact better off.
3. it must create a simultaneous move by all parties to the pact.
4. each party to the pact must be willing to punish violations of the pact
…why, per the fourth condition, would citizens defend a pact, especially if a potential violation would benefit them? The answer is given by the second condition. …if all parties are better off under the pact, then violations make them worse off in the long run.
He provides an interesting historical account of how the U.S. Constitution nearly failed.
many Federalists sought to expand the powers of the federal government beyond those enumerated…Alexander Hamilton sought…to expand national power…the Federalists sought to deal with growing opposition through the Alien and Sedition Acts (1798), allowing them among other things to jail opposition newspaper editors. The situation was sufficiently desperate that both Madison and Jefferson thought the Constitution had failed…
Yet the Constitution did not fail, in part because a sufficient number of Federalist voters agreed with Jefferson that the Federalists’ use of powers was illegitimate, switching allegiance and booting out President John Adams in the election of 1800…With Jefferson taking power in 1801, the Jeffersonians (including many former Anti-Federalists who opposed the Constitution) joined the remaining Federalists in supporting the Constitution.
Weingast describes what happens when the political stakes are high.
the absence of liberty not only grants governments in developing countries a freer hand to manipulate the political and economic structure of their societies, it makes it dangerous to give up power. This danger motivates the government to stifle forms of opposition, including opposition power centers. Economic freedom is often dangerous in this context because it may yield an opposition not dependent on the center and thus potential competition for power.
Constitutions that fail to create limited government are less likely to survive…limiting the stakes lowers the costs to government officials and their constituents of giving up power when they lose elections. This means that they are far less motivated to use all the means at their disposal–including political intervention in markets–to remain in power…
When citizens fail to agree about their rights, governments can take advantage of them gy transgressing the rights of some citizens while retaining the political support of others. In contrast, constitutions that create focal solutions…allow citizens to react in concert against potential transgressions, thus deterring the government from doing so.
In other words, for a constitution to survive, there must be clear, widely-recognized boundaries on what the government can do. If there are no boundaries, or the boundaries are not widely agreed upon and understood, the stakes of politics rise. Political groups start to take unconstitutional means to hold onto power, and economic rights are trampled.
My reading of Amy Chua would suggest that, in the absence of an effective constitution, democracy becomes incompatible with free markets.