A Better Kind of Violence Read online

  The stability we see, however tainted with brutality, may result from alliances built over centuries and a kind of customary application of state violence that has been dialed down to the lowest level consistent with peace. We may then focus on the central question which Chicago political economy leads us to. Namely, what is the root cause blocking a group of people, a society, from engaging in fruitful cooperation?

  The plan of the book is as follows. At the heart of Chicago political economy is the interplay between politics and economic efficiency. Chapter 3 explains what economic efficiency means; how markets may fail to attain efficiency; Arthur Pigou’s views on how government can restore efficiency to the economy; Ronald Coase’s objection to Pigou; how Coase forced economists to think about how institutions such as private firms evolve to minimize the transactions costs involved in attaining economic efficiency and how his analysis of efficiency in private markets opened the door to a new generation of scholars who applied his ideas to government efficiency.

  In chapter 4 the focus is on George Stigler’s The Theory of Economic Regulation, which contained the basic assumptions and logic of Chicago political economy. The most difficult and contentious assumption is that all of government activity is simply redistribution of money. Considerable effort is devoted to explaining the thought behind this assumption. The chapter also introduces the notion of a political equilibrium as being the balance between power functions and the inbuilt advantages of victims. This chapter is a springboard to the first mathematically unified statement of Chicago political economy, which is Becker’s A Theory of Competition Among Pressure Groups for Political Influence.

  Chapter 5 is devoted largely to explaining Becker’s article but is not a slavish reproduction of it. The key concept in this chapter is the meaning of political equilibrium. It arises from a game-theoretic interaction between clashing interest groups and has very specific implications for the efficiency of government. And it depends critically on a seemingly obscure “second order condition” which is the increasing harm imposed on victims from equal accruing increases in taxation. This largely neglected feature is what makes Becker’s model work. I will not hide from you that despite being a masterpiece of simplicity Becker’s model is difficult to even begin to understand. Conveying its essence clearly is the challenge of this chapter.

  Chapter 6 is devoted to public choice. It is not a survey of the entire field. Rather it summarizes the public choice view about the difficulty of achieving efficiency in politics. This is enough to give the reader a taste of public choice while allowing us to remain focused on the central theme of this book, namely Chicago political economy’s conception of political equilibrium. This chapter suggests that public choice is not in contradiction with Chicago political economy but rather is a subset of possible political worlds admissible under the Chicago political economy approach to power. The chapter also presents a detailed discussion of Brennan and Buchanan’s competing Leviathan model of politics. This will necessarily entail a brief detour into the classical theory of optimal taxation which was developed by public finance economists who had no concept of how their theories would be used in the field of public choice.

  Particular attention is paid to the public choice notion that thinkers such as themselves can make a difference to public policy. Keynes believed the same. He wrote “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”. Is there any evidence to support this public choice view apart from personal testimonials? The answer to the question goes straight to the heart of the question of efficiency in politics and the meaning of statistical tests of efficiency. Chapter 6 concludes with a brief discussion of mechanism design and how it contrasts with Chicago political economy and public choice.

  Further reading

  Becker, Gary S. (1983). “A Theory of Competition Among Pressure Groups for Political Influence.” The Quarterly Journal of Economics. 98:371-400

  Brennan, Geoffrey and James M. Buchanan (1977). “Towards a Tax Constitution for Leviathan.” Journal of Public Economics. 8:255-273.

  Coase, Ronald H. (1960). “The Problem of Social Cost.” Journal of Law and Economics. 3: 1–44.

  E. Han Kim, Adair Morse, and Luigi Zingales (2006). “What Has Mattered to Economics Since 1970.” Journal of Economic Perspectives. 20:189–202.

  Olson, Mancur (1996). “Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor.” The Journal of Economic Perspectives. 10:3-24.

  Peltzman, Sam (1976). “Toward a More General Theory of Regulation.” Journal of Law and Economics. 19:211-240.

  Pigou, Arthur C. The Economics of Welfare. First edition 1920. Fourth Edition 1932. Palgrave MacMillan. 2013 Kindle Reprint.

  Reder, Melvin W. (1982). “Chicago Economics: Permanence and Change.” Journal of Economic Literature. 20:1-38.

  Rowley, Charles K. “Public Choice and Constitutional Political Economy”. Pages 3-31 in The Encyclopedia of Public Choice. Edited by Charles Rowley und Friedrich Schneider. Springer. 2004.

  Stigler, George G. (1971). “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science. 2:3-21.

  Pigou vs. Coase

  THE PURPOSE OF THIS CHAPTER is to trace the origins of Chicago political economy back to an unlikely source. The reader will learn it is the unexpected by-product of a tussle in 1960 over some obscure points in markets economics.

  The antagonists in the tussle were the then living Ronald Coase and the shadow of Arthur Pigou who had just passed away. Coase was little known in economics. Pigou had some fame among economists from having written The Economics of Welfare in 1920. The book is a masterpiece of applied supply and demand analysis. Pigou’s mastery of this idiom imbued in him a highly developed respect for the abilities of markets to tally the costs and benefits that real world people must consider when making hard economic decisions in mass situations and also alerted him to conditions in which demand and supply represented faulty social accounting due to something called “market failure”. His work radiates through economics in a more natural and penetrating manner than that of most of his contemporaries, including his young admirer Keynes. Perhaps this is why Pigou’s book provoked attack in 1960 from that other master of economic intuition, Ronald Coase, of the University of Chicago.

  Coase was not troubled by Keynes. But in Pigou he sensed a threat that few other market advocates seemed to perceive. He feared that once its arguments became widely understood, and accepted, The Economics of Welfare would give governments a free pass to intervene in markets. Its author had to be taken down a peg; no matter that he had passed away the year before. Coase did not know it at the time, but his spat with a spirit over markets would lead to the creation of a theory of political power and a Nobel Prize.

  In this chapter we follow Coase as he hounds Pigou. To do this we must gain an understanding of the “social accounting” Pigou devised in order to correct what he saw as failures of the free market. These corrections led to a form of economic efficiency named after Vilfredo Pareto, an earlier economist who discovered the concept.

  Coase agreed that markets fail but pointed out that this did not mean governments could succeed any better at correcting these failures. Markets failed when people failed to reach deals that reflected the true costs of the items being transacted. These deals often failed to go through or generated harm because something called a “transaction cost” interposed itself between some parties affected by the deal. If a developer sold to a house buyer but the septic tank installed leaked into a river, riparian rights might be violated but too costly to enforce. So what looked like a deal that created wealth could in fact destroy wealth by devastating a downstream commercial fishery. Coase believed that “institutions” such as courts, and private methods of resolving disputes would evolve to reduc
e transactions costs and allow the benefits of market exchanges to be realized. Coase argued that governments had no special advantage in resolving such property rights issues because they might face equal or higher transactions costs than did the private market, costs such as the cost of organizing the political consensus to take action.

  Though Coase was primarily interested in private markets, his thoughts extended naturally to understanding why certain forms of government, such as democracy and dictatorship, exist. Governments are institutions for allocating resources removed by force from the population. Given the demographic and sociological circumstances of a country, different forms of government might have an advantage over other forms in minimizing the costs that rival interest groups faced when transacting between themselves how public spoils should be divided. In this chapter the reader will become steeped in Coasian thinking so as to be prepared for its application in later chapters to the creation of an ultimate theory of government power. We now rejoin Coase in this examination of Pigou.

  A mild case of interventionism?

  WHAT WAS THE nefarious work by Pigou that troubled Coase and subsequent admirers of capitalism? The Economics of Welfare, when read carefully, turns out to be a meek plea to create a system of correctives for some of the uglier aspects of free markets. Pollution, monopoly, cheating, lying were all forms of “market failure”.

  Pigou reasoned that markets in their perfect condition are supposed to ensure that if two people make a trade then both benefit and no one who is not party to the deal is harmed. Correct prices were the means by which people coordinated their behavior in a mutually fruitful manner. An economy where exchanges benefitted all would build a growing positive ledger of wealth. If while creating wealth for some, private exchanges imposed collateral damage upon others on a persistent basis then impoverishment and collapse would follow behind. For in such a society people could not use prices to coordinate their actions fruitfully. My purchase of a polluting product was not based on the harm its production did to others. Thus my unmoderated consumption reflects a lack of coordination with those who are suffering. Pigou proposed a system of corrective taxes and subsidies that would sensitize market actors to the effects of their decisions upon other people. This system would entice everyone to act as if they took into account the economic fallout of their decisions, thus creating a complete and balanced system of social accounts.

  While not rejecting Pigou’s logic, Coase felt that Pigou was looking for solutions in the wrong place. Instead of seeking the help of some benevolent government that would step in to correct skewed prices, the market could take care of the problem if people were able to receive compensation for damages to their property. The Pigou solution tried to impose correct prices from the top-down. Coase believed these prices might emerge from the bottom-up. Whether they did or not depended on the “transactions costs” people faced in reaching deals with each other to avoid needless waste. People would devise institutions and mechanisms such as courts, property rights, social customs to minimize these transactions costs. Instead of looking to some abstract entity such as “government” which provided “correct” market prices seemingly at zero-cost, Coase advocated a realistic assessment of the cost of devising institutions, be these private or public, that minimized the costs people faced in reaching mutually beneficial solutions to conflicts regarding resources.

  The Coase-Pigou debate was important because it catapulted economics into its next stage of development. Out of an abstract discussion of social accounts arising from supply and demand would emerge a practical appreciation of how institutions, whose existence had been taken for granted, such as government, the law, private companies, and markets, emerged from the quest to keep to a minimum the costs of transacting all forms of exchange between people. This next phase in economics led to revolutions in game theory, culminating in something called mechanism design. It inspired Nobelists Elinor Ostrom and Walter Williamson in their separate quests to understand why institutions arise. How do you design institutions to minimize the costs of organizing cooperation between large numbers of people? But more importantly, the transaction cost approach to institutions was the basis upon which Chicago political economy would develop its claim that governments evolve towards providing policies that are economically efficient.

  What is economic efficiency?

  BEFORE WE CAN fully understand the contribution of the Coase-Pigou conflict to the creation of a total theory of power, we need to see what all the fuss was about.

  It was about Pareto-efficiency. Given the right circumstances institutions might evolve to foster this sort of efficiency. But what is it and is it desirable? We need to make a detour into this topic. It is essential for the comprehension of all that follows.

  The concept of economic efficiency can be stated in a line or two, but skimming over the idea will not allow us to master the elements of Chicago’s view of how power determines the allocation of resources. We need to take a leaf from the expository techniques of E.T. Bell, who wrote Men of Mathematics, and Paul de Kruif who wrote Microbe Hunters. These and other masters of scientific exposition believed that theories could not be dissected as one would a cadaver in an anatomy lesson of Dr. Tulp. The need for these theories must be made plain and the painful steps in their evolution must be traced to arrive at a mature and sympathetic understanding of what they are about. To understand economic efficiency, which is at the heart of Chicago political economy we must ask why economics was created. The answer depends on the appearance of a need for such a science two hundred years ago.

  Some might feel an apology is in order for subjecting the reader to such a discursion. None is needed. Economists are poor expositors of the foundational concept of their science. A few minutes spent learning what economic efficiency means, and its broader significance, is time well, and enjoyably spent. What you read below may surprise you.

  The creation of economics

  ECONOMICS WAS BORN in the British industrial revolution of the late 18th century. There had been no need for such a science before. What might seem like a lack of curiosity by thinkers before then was really just a lack of urgency and necessity. The world changed little. Relations between people in Britain had been stable. The sons of blacksmiths became blacksmiths. The poor bred more poor and the rich entailed their wealth to sons who were expected to repeat the process. For the most part people of different classes retained their memberships therein and entered into stable long-term relations with other classes. Markets as we know them now barely existed. There were occasional farmer’s markets, an organized wool and corn trade, construction guilds in some cities. But there were no regular commercial upheavals that put in question the social order. Without perceptible challenges to that order there was no demand for a science that would be of help in managing dangerous economic changes. People of the time could not even have conceived of what such a science would look like. Economics would have made no sense.

  The degree to which a market economy was present in any period of history before the 19th century is somewhat of a speculative exercise which nonetheless is the fruit of many decades of work. In The Livelihood of Man, an early foray into this subject, Karl Polanyi argued that despite certain archeological evidence such as Hammurabi’s legal code, there is almost no evidence for developed markets in pre-Roman antiquity.

  Modern research has been led by Peter Temin. In a 2006 survey of Rome and other historical economies, he argues that while there were some product markets in medieval Europe, factor markets, that is markets for labor, were very rudimentary. The use of labor was largely dictated by feudal lords or determined at the village level by the challenges of communal projects in which an egalitarian contribution of effort was expected of everyone in draining fields, building storage structures, and defending against intruders.

  According to historian Norman Cantor, even product markets had a limited audience. They were dominated by the demands of about three hundred super-rich families who contra
cted with millions of artisans, and labourers for delivery of made to order products. The limited degree of market development in medieval Europe meant that relations between the lord-purchaser and the lower-class producer solidified with time and created a significant barrier to the entry of new competitors. Such relations tended to solidify and fit in with the overall static nature of pre-industrial society.

  When the industrial revolution got rolling social confusion about change called for some thought. Innovation created wealth but put sluggish firms out of business. The unemployed uprooted themselves from their native communities to find work. A disgruntled urban proletariat formed. Activists began questioning the fairness of the new economy. Politicians asked whether it were not better to restrain commerce. A demand arose for explanations.

  Social accounting

  THE ATHENIANS HAD been down this path to discovery during their great period of commercial rise. They erred by attempts to explain change in terms that were more personal than social. The works of Sophocles and Euripides are profound examinations of individuals who feel trapped in their new social roles.

  In Britain and Europe some analysis more oriented towards mass reorganization was called for. The intellectual community of the day rose to the challenge by sketching the outlines of what might be called social accounting. The analysis of masses was helped along by the development of the science of statistics. It was reaching maturity during the 19th century, partially under the impetus of insurance companies seeking to lower costs through the use of actuarial tables.

  Social accounting sounds grand but is really quite simple. Societies are groups of people bound to each other by a mixture of self-interest , which can be broadly defined to include altruism if one thinks about that carefully, and compulsion. Each person keeps a ledger of what he or she puts into society and what he or she gets out of it. People may not be happy with the balance in the ledger but as long as some critical number of them believe the status quo gives them more than the alternatives, a society will persist.