Friday, March 29, 2019

Francis Fukuyama against mainstream economics

I mentioned in my last post in which I reviewed Francis Fukuyama’s excellent “The origins of political order” that in my next post I will present some further comments on the book. (The first post was mostly a summary of the book’s key points.)

But as I was taking notes of the book—a thing I have been doing for many years after finishing good books—I noticed among my notes a number of Fukuyama’s views on economics, many directy critical of some mainstream nostrums. Because I think that few economists have read Fukuyama, and perhaps  even fewer have read him attentively, and perhaps even fewer have read the entire book, I decided to bring up Fukuyama’s several economic statements, with only minimal commentary from me.  

Against “property rights fetishism” (Fukuyama’s term)

“The theory that links the different components of the rule of law to economic growth is empirically questionable and becomes doubly so when projected back onto societies that existed under Malthusian economic conditions” (p. 247).
“In a Malthusian economy where intensive growth is not possible, strong property rights simply reinforce the existing distribution of resources. The actual distribution of wealth is more likely to represent chance starting conditions or the property holders access to political power than productivity or hard work….rigid defenders of property rights often forget that the existing distribution of wealth does not always reflect the superior virtue of the wealthy and that markets are not always efficient” (p 142).
At the end of the book, Fukuyama, when discussing the contemporary China, writes that “good enough” rule of law is often sufficient for fast economic growth. Moreover, technology is much more important than property rights. Fukuyama points out that in a Malthusian world, no property rights will provide you with an economic surplus; but technological development will (p. 249).

These comments are quite clearly a critique of the views propounded by Daron Acemoglu and James Robinson in, among other works, “Why Nations Fail” (the book was published after Fukuyama’s “The origins...”); but also of a number of economists who in a Whiggish type of history-writing consider the protection of property rights as almost a sole, or a sufficient, factor needed to ensure economic growth. Economic historians  have generally been much less convinced of that.

Against Hayek
In several sections of the book, Fukuyama criticizes Hayek’s ahistoricism, that is, the assumption, frequently stated in Hayek’s work (including in “Law, Legislation and Liberty”), that the English Common Law emerged entirely through “spontaneous” decentralized coordination. This is rejected by Fukuyama, who argues that without a strong state Common Law would have never come into existence.
Here is the key point:

“Hayek was simply wrong about certain of his historical facts” (p. 254). “The later evolution of the Common Law might have been a spontaneous process, but its existence as a framework for legal decision-making required centralized political power to bring it into being” (p. 258).
And also,
“This is the point that Hayek and his libertarian followers fail to see: the Common Law may be the work of dispersed judges, but it would not have come into being in the first place…without a strong centralized state” (p. 260).
The same thing is repeated, almost verbatim, on p. 253.
In the last section of the book, there is yet another critique of Hayek. Pace Hayek, large scale designs sometimes do work, writes Fukuyama (p. 446). In other words, “constructivism” is not bound to fail every time.

Against Mancur Olson
Fukuyama also disagrees with Mancur Olson. The critique is made in the context of the discussion that tries to explain why Chinese absolutism that was neither constrained by the rule of law nor accountability, imposed only very limited taxes on citizenry. (This was also discussed recently by Debin Ma in his “Rock, Scissors, Paper”.) Fukuyama gives several reasons, including difficulties of delegation and control over an extensive domain, “satisficing” rather than maximizing behavior etc.
I am not sure however if his critique of Olson is justified because in Olson’s model, Chinese emperors are “stationary bandits”; hence they have an “all-encompassing interest” and are not indifferent to the wealth of the realm. It is then possible that the tax rates they applied did not attempt to maximize own revenue.

Here is Fukuyama:  

“The only problem with Olson´s theory is that isn’t correct. The rulers of traditional agrarian societies often failed to tax their subjects at anything close to Olson´s posited maximizing rate” (p. 304).
“Olson´s assumption that any ruler would want to maximize revenues reflects the common assumption of modern economics that maximization is a universal characteristic of human behavior. But this is an anachronistic projection of modern values backward onto a society that did not necessarily share them” (p. 306).

Against the rational choice model
The last sentence could also be read as a link with the next critique: that of a rational homo economicus. Fukuyama’s argument is that humans are social beings; they never existed in a presocial state, and cooperation is not merely the product of them figuring out whether they are in some cases better off cooperating than not. Coperation, Fukuyama seems to say, is “hard-wired” since humans were always “social animals”. (This argument is consistent with Fukuyama’s emphasis on “patrimonialization”, or tribalism, as a defining feature of most historical political orders.)

“..a rational choice model of collective action in which individuals calculate that they will be better off by cooperating with one another, vastly understates the degree of social cooperation that exists in human societies and misunderstands the motives that underlie it” (p. 439).
And again, a few pages later: 

“rational self-interest is wholly inadequate in explaining the degree of social cooperation” (p. 442).
Against Amartya Sen
Just one sentence here, to say that current Indian democracy is not based on a history of democracy in Indian states but on the fact that the fragmented Indian polity, with the “checks and balances” exercised by the Brahmins over the rulers never allowed for the rise of absolutism. There was no history of democracy in India; but, importantly, there never was a social basis for tyranny.

“This is a very superficial view of contemporary Indian politics. It is not that democracy in its modern institutional manifestations is deeply rooted in ancient Indian practices, as observers like Amartya Sen have suggested. Rather the course of Indian political development demonstrates that there never was the social basis for development  of a tyrannical state that could concentrate power, to reach deeply into society and change its fundamental social institutions” (p. 187).
I am not sure that on this point Fukuyama and Amartya Sen are so far apart as the statement implies—but I may be wrong.

At the end, another concept that I really liked, handsomly-termed,  “the iron law of latifundia” or large real estates: “the rich tend to get richer in the absence of state intervention” (p. 368)

Fukuyama by these statements surely calls on the economists to rethink some of their cherished ideas. And to ask: do such ideas work only now, but not in history; do they work only on paper, but not in real life?

Monday, March 25, 2019

A Grand Fresco: The Origins of Political Order

How do you write about a book that is almost 600 pages long (in small print), has 25 pages of references, and the ambition to explain political institutions from the dawn of mankind to the French Revolution, from kinship-based bands of hunters to Voltaire? This was Francis Fukuyama’s objective in this monumental (yet eminently readable) book, “The Origins of PoliticalOrder” (note the plural).

My review, given the size and importance of the book, will be done in two parts, First, here, I will review the logic of the arguments put forward by Fukuyama. In the second review, I will engage into some critique.

There is one key idea of the book. If you wish to have a functional political order that enables economic growth and gives people freedom from arbitrariness of the sovereign or from oppression by their peers, you need three components: (i) a strong state, (ii) rule of law, and (iii) accountability.

It may seem at first that this is nothing especially new, but the way that Fukuyama presents his case is. A strong state is needed to provide public goods (most important being domestic law and order, protection of property, and defense against external attack). But the strong state has  to be “penned in” from two sides. From the top (as it were) by an ideology or religion that imposes limits on the state: this is the rule of law. Sovereign himself, however powerful, has to be subject to law. The second constraint comes from below: the state needs to be accepted, that is, accountable to people (where “people” is variously defined). We thus achieve the seemingly impossible: we have a strong state that cannot behave as it pleases, and needs some form of consent of those it governs.

The three independent component parts allow Fukuyama to show how one of them was achieved by some societies, two by others, but that they came together, all three, only in the 17th century England. China is the case of what Fukuyama calls “precocious state formation”. Qin China was the first to create a state: a process which, according to Fukuyama, is fundamentally unnatural because to have a state means to fight “patrimonialism”, people’s innate tendency to favor their own kin and tribe. State on the contrary requires clear, impersonal rules and system of advancement based on some general criteria including merit. Qin China, through ruthless centralization, and the defeat of a number of regional aristocracies, achieved that. But, it achieved it, Fukuyama thinks, too early. China thus created a powerful state –a thing which eludes many communities still today, more than two millennia after the Chinese did it—but it never created rule of law nor accountability. It was absolutist, from the start until today.

The absence of the rule of law of course does not mean that there is no law. What is today called “rule by law” (as opposed to the rule of law) is what Legalism was in China: ability of the Emperor to create laws at will, and have them obeyed. There was no lawlessness nor anomie but there was neither rule of law that constrained the state: a set of rules that can be changed only through previously agreed procedures.

There were cases of states that had an early form of the rule of law: religious rules that limited sovereign’s ability to do whatever he wanted. But such societies lacked either accountability, or both accountability and a strong state. Religions, according to Fukuyama, were useful in producing the rule of law because they placed the sovereign under one higher law: divine. This was the case in Islam (Umayyads, Abbasids and later Ottomans and Memluks), India thanks to Hinduism and Buddhism, and Europe thanks to Christianity (or rather mostly thanks to Catholicism).  

The absence of rule of law in China is seen as due to the absence of a codified religion with its divinely-ordained rules. In effect, codification of religion—being  a “people of the book”—is what Fukuyama believes is needed for the creation of early rule of law. Writing down divine rules, and having them “embodied” in a group of scholars or religious orders (ulamas, Brahmins, Christian clergy) whose main purpose is to watch over their application, limited the arbitrary power of the sultans, Indian princes and European kings.

Ottomans come for a special praise because they were able to create a strong state and an early rule of law (the latter, as just explained, thanks to Islam). The strong state was built on the backs of devşirme, the practice of abducting Christian children from their parents in order to create an elite corps of soldier- and administrator-slaves. This (in many ways abhorrent) practice allowed Ottomans to create a non-patrimonial state, to keep the grandees at bay, and not let kinship and family relations dominate the state. Ottoman decay began when janissaries were finally able to parlay their advantage to their children and then, together with magnates, to repatrimonialize the state. A one-generation aristocracy is the best way to ensure a strong non-patrimonial state. But it is hard to achieve because of people’s desire to transmit their advantages to offspring.

Accountability is the last to get on the scene. Until the European democratic revolutions, accountability was mostly non-existent (the Sultans did not have to ask people for permission for their actions) and was, at best, limited. It worked through the power of aristocracy, clergy or gentry to provide checks on the sovereign, principally to control the introduction of new taxes (Cortes in Spain, regional parlements in France, zemskiy sobor in Russia). But until the advent of the English parliament accountability was not only limited to a few classes, but sporadically exercised and even more sporadically obeyed.  It thus waxed and waned depending on the relative powers of the sovereign and aristocracy.

When does the political order decay? When the state is incapable to reform itself  to respond to new challenges (say, a powerful neighbor) and when it gets repatrimonalized.  The decay section is not exactly novel (to  be unable to reform is not very original), but the emphasis on repatrimonization as the source of decay allows us to better see that the state remains an unnatural organization in the sense that it is permanently in danger of succumbing to the more atavistic instincts of human nature—to prefer own kin rather than be subject to impersonal rules.

To have a strong state is therefore to be engaged in a permanent struggle against family. Christianity, according to Fukuyama, was particularly good in fighting family ties; Chinese history can be summarized as one endless conflict between the state and family. Every time you give a job to your friend or cousin, you are repartrimonalizing the state. And think how unnatural it is to behave equally toward everybody for it means, as noted by Montesquieu, that “a virtuous man has no friends”.

In the next post, I will provide some thoughts on the organization of the book, and a few critiques.