Wolves and Sheep Choosing Dinner
Democracy versus Capitalism - who won? who's next? You decide!
Recently, Daron Acemoglu, Simon Johnson, and James Robinson (AJR for short) received the Nobel Prize in Economics for their work on economic development and institutions. I’ve summed up their work, and criticized the book Why Nations Fail, but it also opened the floodgates for a bunch of discussion on the merits of them winning the Prize and further discourse about a simple issue: what’s the relationship between political institutions, economic institutions, and economic growth? I actually wrote it a few weeks ago to have as a backup, but it turned out to also be darkly timely.
Which Nations Fail
The relationship between growth and democracy is extremely complicated - a while back I wrote about it using the video game Fallout New Vegas as a pretext. The first, most basic issue, is that democracies might be richer because democracy itself causes wealth, or other possible reverse causalities. It does seem, however, that the theory of the “modernizing despot”, a dictator that eschews popularity to overhaul the economy, is more the exception than the rule - non-democracies tend to be poorer. A recent paper by Acemoglu, Johnson, and others finds that democracies have higher growth than non-democracies by examining whether switching from one to the other raises growth - it does, so that after 25 years it raises GDP per capita by 20%. That’s not really a lot (for a country with a GDP per capita of $2,000, it would go up to 2,400), and a massive issue is that democracies tend to place sanctions on non-democracies. Other, earlier research by Acemoglu, Robinson, and others finds that there isn’t a direct association between income and democracy either way, but that there is a clear correlation - so countries that are democratic are also richer for qualities jointly determining wealth and democratization.
However, what is the theoretical case? The best known example is the one made by the recent Nobel Laureates - in both their academic work and in the book Why Nations Fail. The general explanation here is quite simple: the underlying driver of economic development isn’t geography or government policies, but rather institutions, which are generally defined as “the rules of the game” of a country’s politics, economy, and society. These institutions are formed by bargaining processes between elites, who hold all the wealth and power, and everyone else - the bargain is that the other people want to share in on that power, and if they have enough muscle or money, they can pull off concessions, and if they can’t they get nothing. Democratization is a compromise between redistribution and repression, basically, and there’s a lot of intermediate scenarios - the elite may partially democratize, or be so powerful that they control even a full democracy.
This means that economic/political set ups can have basically two flavors: inclusive and extractive. Inclusive institutions have both broad political participation and relatively less concentrated wealth, so elites not having a veto over everything allows for stable and well-executed rulemaking by the state, a competent provision of public services, participation in an open market, and protection of property rights. Meanwhile, extractive institutions are set up so that a small cadre can comandeer the state for their own purposes. This means that the elite can block technological, social, political, and economic changes that threaten their social dominance.
The throughline is that broader divergences in initial economic and political power drive bargains between classes, which shape political and economic “rules”, which shape economic and technological trends. This can explain why countries adopt bad policies (because the coalition dominating their institutions prevents them), even though the path from one to another is not especially clear, and why they have or don’t have sufficient human capital and investment. This is especially stark considering that highly unequal property holdings can result in lower provision of public services - which tend to greatly pay off, even indirectly. Additionally, if inventors and innovators can’t trust that their profits will be their own, it is unlikely that they invent and innovate, so if people can own their own land, keep the profits, and decide how to use them, they tend to invest more, which is linked with greater prosperity compared to regions with elite meddling.
In this sense, elites with political power blocking innovation can hinder productivity growth, particularly because these elites are highly persistent over time: top Venetian familes in the 13th century are still at the top today, and slaveowners in St Croix largely retained their status even during multiple sociopolitical upheavals - largely because of intra-elite ties, such as Confederate inter-marrying preserving the long-term wealth of slaveowners. In this vein, historically, rights movements have been associated with demands for economic rights - particularly, the right to have ones own property be protected from the powerful. A vital part of feminist demands were to have economic rights - the right to own property and dispose of your labor. In fact, granting political rights to women before economic rights is both what happened in basically every society and what AJR would have predicted to happen. This was also true of the Civil Rights Movement in the US, and of the gay rights movement - the court case that legalized gay marriage (Obergefell vs Hodges) was actually about inheritance rights for gay spouses. In a less optimistic note, at the core of the demands of modern trans activists are _economic_ concerns, about job and housing discrimination, health insurance, etc.
The peculiar institution
A recent article for the Financial Times Alphaville section criticizes the AJR Nobel for a variety of reasons: not engaging with the history literature enough (true of most economists except econ historians), neglecting the connections between slavery, capitalism, and colonialism (wrong!), and not touching slavery enough anyways. I have a specific piece commenting on this (and also running through other criticisms of AJR), so let’s focus on slavery for a minute because of its importance to the debate.
Slavery has, of course, been part of the research agenda in economics. Firstly, slavery created long scars in Africa, both to economic development and to social attitudes and trust. While slavery had a complicated relationship with economic development in the metropolis, the truth is that it does pose a complicated question: why did the ultimate extractive institution coexist with democratization? It gets especially thorny when considering that forced labor in some cases strengthened economic development in the colonies - as is the case of indentured mining labor in Peru. In this particular case, the clearly extractive institution of forced labor in the silver mines resulted in more development, no less, because mining elites were more politically powerful than other elites and could more successfully lobby government for public services, infrastructure, and funding for the area. I have a full post about this that you can read, by the way.
But it opens a bunch of questions of their own - if plainly extractive institutions can be economically positive, is there actually a relationship between democracy and growth? If it’s good economic policies and their outcomes that explain growth, and having good institutions doesn’t necessarily mean that those policies are adopted, then what happens? This can get complicated very fast - first, by the fact that popular support for democracy is highly correlated with economic prosperity. This study in particular (Spanish summary here) finds that individuals with longer support for democracy support democratic institutions at higher rates, but only when those democracies could deliver economic growth, public services, and stability. The opposite also appears to have some truth: extractive institutions can coexist with strong growth, which strengthens their extractiveness, whereas they tend to be contested with weak growth.
A traditional case in this sense is that countries develop when their government can be trusted to not break rules it agrees to, with the caveat that states also need to be strong enough to be able to enforce those same rules - for example, in Sierra Leone, special courts designed to solve land disputes actually struggle to do so mainly by just attracting more of them. Overall, weak governments struggle to meet most of their basic functions: postcolonial Latin American governments were too fiscally weak to provide public goods and forced them to take inefficient macroeconomic policies to counteract, weakening their legitimacy.
Overall, state weakness is extremely harmful for legitimacy: weak states create incentives for antidemocratic behavior, which sustains state weakness, which sustains antidemocratic behaviors. Non-democratic behavior also follows this path, where maximizing regime survival means developing subpar state capacity and supressing democratic dissent. Corruption, another hallmark of weak states, is also extremely economically deleterious. Support for non-democratization, by the way, appears highly correlated with a desire to engage in corruption: voters, eager to get results, team up with bribe-happy elites to tear down institutional constraints. Political polarization, additionally, can cause and worsen antidemocratic rifts in the electorate.
So overall, the case for “modernizing dictatorships” is quite weak, but also the case for economic modernization causing political democratization - in fact, it seems that weak democracies tend to select themselves into surviviving by being economically successful, which strengthens them, whilst weak non-democracies with weak economic performance are likelier to become democratic. In this sense, democratization is accompanied by increased risk premia, while autocratization isn’t, mainly because democratization is expected to be accompanied by an increase in public sector provision of services and of redistributive policies.
The mind virus
Overall, it starts to make sense how to square the basic understanding of “good institutions” (democracy and property rights, basically) with the fact that good policies and good governance aren’t necessarily associated with good outcomes. But institutions and economic policy isn’t everything: despite similar land ownership structures and wealth inequality, Prussia and Sweden had different degrees of success by authoritarian movements. The milllion dollar question, why, has to do with culture and systems of beliefs, particularly about institutions. This is especially true when taking into account that people don’t necessarily have a firm grip on how institutions are working, and don’t have a grip on whether the economy is delivering either.
So, where do cultural values come from? Big question with, necessarily, a big answer. This is actually a big locus of interest for Acemoglu and Robinson these days, where they increasingly emphasize the role of culture (especially big, sudden changes in cultural attitudes) in determining the configuration of political and economic systems. Allowing for rich cultural responses to political change, one can understand how this is all co-determined. Particularly, cultural attitudes and values can determine whether a government that is delivering wealth can use it to sustain its legitimacy - for example, traditional Confucian values can explain why Chinese prosperity was not accompanied with democratization, but the two moved side-by-side in England. A similar case can be made for the economic development of the Islamic World relative to its political development - cultural values underpinning diverging trajectories.
Where culture comes from is, of course, an extraordinarily thorny subject. For instance, ancestral farming practices shaped modern gender roles - societies that used the plough in agriculture have lower female labor participation rate and lower political representation of women. Similarly, ancient values developed from societies of cattle herders push for cultural norms that emphasize revenge and violence, and tend to have higher rates of female genital mutilation and a variety of regressive positions on gender roles. This was due to the interest of men in these societies in restricting unsupervised sexual contact (FGM makes sexual intercourse excruciatingly painful).
In this sense, it seems that values and preferences drive economic policy beliefs: individuals who have stronger senses of selifshness oppose redistirbution in most cases, whilst individuals concerned with fairness support it in most cases as well, and individuals who are altruistic are case-by-case, thus underpinning the material basis for social action and elite wealth hoarding. Additionally, cultures with higher levels of universalist values (i.e. less likelihood to make exceptions to rules) tend to be correlated with “broader” political and redistributive preferences (summed up here), rather than the self-interest of particularism. Additionally, whether a society has more individualistic or collectivist values is related to whether it needed more intensive agricultural labor in the past - and collectivist mindsets in particular are closely interlinked with regressive views on gender. Lastly, zero-sum thinking (that is, the belief that society has “winners” and “losers” exclusively) is linked with redistributive preferences, which are determined by social interactions and networks.
Particularly, values tend to shape how people interact with government, and history shapes these values. In Africa, a history of exposure to the slave trade results in lower trust in neighbors, relatives, and the government, and belief in traditional African religions is both deeply impactful on economic practices, and related to the history of Christian missionary activity in the area. In the United States, areas in the “frontier” selected for people who were very individualistic, but also rewarded cooperation with small, strong, localized groups. Counties with longer frontier history have more individualistic values, stronger localist communal values and attitudes, and oppose federal taxes relative to state taxes; plus, they are more conservative on the gender axis, and have more “intracultural” marriage matches. And people with a cultural background that emphasizes certain values like different movies than people not from those backgrounds.
It’s important to note that, in the same way that economic institutions can economic elites with political influence, cultural institutions can create cultural elites with political influence. The most obvious examples are men: while the patriarchy is an economic and political institution too, these days its remainders are as a cultural one, where men have higher prestige than women. This can be reflected, for example, in the fact that when Saudi women were first allowed to drive, their husbands responded by allowing them to do so, but curtailing their rights elsewhere - thus securing the man’s dominance. Likewise, Saudi husbands are actually overall fairly supportive of their wives working, but voice opposition in order to secure the approval of other men, while women are overall misinformed about their labor market outlook and the desires and aspirations of other women. Qataris express concern for women working, particularly in close proximity to men, mainly as a product of other people’s opinions of them. And in the US, single and “taken” women answer surveys about ambition similarly in private, but differently (more conservatively) in public, in order to not scare away potential boyfriends - which they are socialized to do by other women.
One other example of a cultural elite comes from religion: particularly, the Catholic Church. Much like political/economic elites can use their power to supress economic and scientific changes, so can the cultural elites: the Catholic Counterreformation (i.e. reaction to Protestantism - that’s also where the term Reactionary comes from) went on a large campaign of book-banning and information supression in Catholic Europe, which went from being on par with Protestant areas in science to falling behind. Spain in particular fell behind twice, because the Spanish Inquisition was reactivated from 1789 to the 1830s, which again caused a relative delay in scientific advancement. And Protestantism also encouraged women to read the Bible, which was linked with lower gender gaps in literacy.
Okay, but this sounds rather pessimistic - is it really possible to change people’s minds, then? Or are they just doomed to be conservative because of agrarian practices from 10,000 years ago? Well, persuasion matters. Being around people who are different than you helps you become more respectful and accepting of them, so for example intra-class prejudices in Indian schools declined when exposed to other-caste students (Spanish summary here). Western culture is largely “open” because of the role of the Catholic Church, which both expanded the scope of trust, and reduced the importance of kin. Exposure to inventors, particularly for underrepresented groups, can boost future inventing activity. Stalin’s forced deportations of Protestants resulted in higher gender equality in the areas they were deported to, whilst being exposed to talented female coworkers increases approval of working women among men. This is, of course, not necessarily positive: the movie Birth of a Nation, which positively depicts the Ku Klux Klan, increased affiliation with the organization, whilst the diaspora of former Confederate soldiers and the migration of religious conservatives from the US South to the rest of the country resulted in their regressive values being spread to their new homes.
This doesn’t mean that openness and diversity don’t play with politics and economics. Social cohesion is crucial for maintaining and determining institutional quality, and in many African countries high ethnic fractionalization is correlated with underdevelopment through distortions of policy. This is, however, nuanced: ethnic diversity does not impact economic policy with good enough institutions, but does impact it with bad institutions, basically because of capture - and not of violence. Violence is also codetermined with poverty: ethnic tensions don’t create violence unless slow economic growth is involved.
Conclusion
So this is all complicated, but fundamentally the relationship here is that democracy doesn’t hinder or promote economic growth - the myth of two wolves and a sheep voting for dinner is false, but so is “modernization theory”. Fundamentally, the value of democracy is moral, before practical - humans are social animals and therefore deserve to choose over the decisions made by the community. However, the benefits of having a democratic polity are first, that bad policy decisions can be reversed; second; that economic decisions are made with economic logic; and last, that it is possible for grievances to be recognized and addressed. These points seem a bit more important to stress than when I first wrote this post, but whatever. Let’s all just be nice to each other, and try to aim for a stronger liberal project.
Good post