The role of the state in the economy By David Sloan Wilson and Daron Acemoglu, By Evonomics: The Next Evolution of Economics, March 24, 2016
Economist Daron Acemoğlu: ” We cannot benefit from so many things we take for granted without a powerful state, but then civil society and our institutions need to be even more powerful in order to be able to control the state, particularly since a capable state in a complex society could be a formidable tool of extraction that countless politicians, bureaucrats and organized interests would want to use it for their own benefit or agenda. Put differently, trying to dominate society is in the DNA of the state, but this is no reason to belittle how much of our security, prosperity and even social development we owe to state institutions.” http://bit.ly/2ihG22l
In an address that I recently gave at George Mason University’s Mercatus Center, I praised Friedrich Hayek as a pioneer for describing economic systems as products of cultural group selection. I also pointed out that his views require updating—unsurprising, given all that we have learned about cultural multilevel selection since he wrote. The updating is not trivial but strikes at the heart of what Hayek stands for in modern political discourse—the ideal of a free market economy unimpeded by state planning. Here is a key passage from The Fatal Conceit.
Rome gave the world the prototype of private law based on the most absolute conception of several property. The decline and final collapse of this first extended order came only after central administration in Rome increasingly displaced free endeavor. This sequence has been repeated again and again: civilization might spread, but it is not likely to advance much further, under a government that takes over the direction of daily affairs from its citizens. It would seem that no advanced civilization has yet developed without a government which saw its chief aim in the protection of private property, but that again and again the further evolution and growth to which this gave rise was halted by a ‘strong’ government. Governments strong enough to protect individuals against the violence of their fellows make possible the evolution of an increasingly complex order of spontaneous and voluntary cooperation. Sooner or later, however, they tend to abuse that power and to suppress the freedom they had earlier secured in order to enforce their own presumably greater wisdom and not to allow ‘social institutions to develop in a haphazard manner’ (to take a characteristic expression that is found under the heading ‘social engineering’ in the Fontana/Harper Dictionary of Modern Thought (1977) [Routledge edition p 32].
There you have Hayek’s portrayal of world history. No one is better qualified to provide an update than MIT economist Daron Acemoglu, author (with James A. Robinson) of the magisterial Why Nations Fail: The Origins of Power, Prosperity, and Poverty. I was prompted to contact him for an interview not because of his magnum opus, but because of a quirky little study of post offices and patents in 19th Century America that is available on the Social Science Research Network and came to my attention via Twitter.
DSW: Welcome, Daron, to Evonomics.com.
DA: Thank you very much David. That’s a great pleasure to be having this conversation with you.
DSW: Let’s ease into the big issues with your new study (with Jacob Moscona and James Robinson). What did you show about 19th Century America and why is it relevant to 21st Century America and the world?
DA: Let me start with some background. James and I are in the process of working on a new book, and also writing a number of papers related to it. The book, provisionally entitled Living with the Leviathan, is about the role of the state, and very much relates to the Hayek quote you started with. When is it that the state acts like an unabashed agent of some political elite, repressing society and extracting resources from it, and when is it that it works towards the public good, developing capacity, imposing and implementing fair laws, providing public services, and protecting its citizens? We touch on this issue a little bit in Why Nations Fail, but do not dig sufficiently deep. The more one investigates this issue, the more one realizes that something we pay little attention in social science is central in reality: some states just do not have the capacity to provide services, enforce laws, or guarantee security. Much of our new book is devoted to developing a historically-grounded theory of why this state capacity develops in some places and not in others (spoiler alert: we disagree with the dominant view in political science and sociology on this topic that such capacity has to be preceded by a powerful leader or political group imposing their will against other powerholders and ultimately the monopoly of violence over their society).
In any case, without making my answer even longer, the paper with Jacob is one of a series of papers we have been working on trying to make the case that state capacity does indeed matter greatly, thus justifying our investigation and theorizing on the roots of state capacity in the first place.
The context of the paper is the US in the 19th century, which is often viewed as a society with a weak state. This is not entirely untrue. But the weakness of the US federal state is often exaggerated. What’s worse is that from this observation of state weakness, it is easy to jump to the conclusion that it was the weakness of the US state that laid the foundations of economic growth. We wanted to critically investigate this issue. This little paper starts by noting that the U.S. Postal Service, which was the largest federal agency and employer at the time, was playing a pivotal role not only in connecting the country, but bringing a range of services to distant corners of the United States. It’s also a symbol of the presence of the federal state. All of this made us wonder whether counties that got the post office became more likely to innovate and patent. The empirical evidence we present strongly supports this hypothesis: the opening of a new post office is associated with a significant increase in patenting in the county. We cannot categorically rule out other factors leading both to the introduction of new post offices and a simultaneous pickup in patenting in some counties, but our evidence suggests that this is unlikely to be driven by any obvious omitted factors or reverse causality. So what we are finding is a suggestive piece of evidence that even in the US society with its quintessentially weak federal state, state presence may have played a defining role and innovations.
This finding is also relevant because many people, including most recently Robert Gordon in his new book, The Rise and Fall of American Growth, places great emphasis on technological innovations undergirding US growth, but his vision, by and large, is one of “exogenous technology,” not significantly affected by institutions or other economic variables. Our finding pushes against this view, showing that state presence, presumably because of the enforcement of property rights and the provision of public services it provides, was likely a major determinant of innovations, even in 19th-century US.
DSW: I love the quote from Tocqueville, writing in 1831, that you provide in your article: “There is an astonishing circulation of letters and newspapers among these savage woods…I do not think that in the most enlightened districts of France there is an intellectual movement either so rapid or on such a scale as in this wilderness.” Let me see if I understand your thesis correctly by breaking it into parts:
1) A large-scale society requires an infrastructure to function as a corporate unit. A post office system for a nation is like a nervous system for an organism.
2) Creating a societal-level infrastructure requires decisions made and implemented on behalf of the society as a whole. The U.S. Postal system did not and could not emerge spontaneously from individuals or sub-units of the nation acting in their narrow self-interests.
3) Only some states are structured to make decisions on behalf of the whole state. Others are structured to benefit a small group of elites at the expense of the rest of the state. This is the distinction that you make between inclusive and extractive societies in Why Nations Fail.
Does this accurately represent your thesis?
DA: Yes. This is part of our argument, but there is a little bit more to it. The post office is also a marker for the presence of the state more broadly. If a place is capable of housing a post office, it means that it has some basic level of law enforcement and protection, and it is on the radar screen to be monitored and regulated by the federal government (even if that monitoring and regulation is quite light for much of the 19th century). In other words, it is likely to be enjoying all of the things that most modern states provide and we take for granted.
Some think that human cooperation can develop in a spontaneous way (Hayek comes close to this at times), or because cooperation creates an edge, the forces towards the evolution of a psychology of group cooperation are going to ensure that tribes, villages or even bigger polities can develop a sophisticated order without the state. The famous book by Robert Ellickson, Order without Law, claims that the complex relations between farmers and ranchers in Shasta County, California happens not thanks to the law, but without any reference to the law, instead relying on informal norms that have evolved over time. This may well be true, but is not the general pattern of what happens without law and the state playing the role of conflict resolution and law enforcement in much of the world. In Why Nations Fail, we explain why Somalia is so dysfunctional, linking this to the almost complete absence of conflict resolution from the state. Even small disputes in Somalia can spiral into feuds or even clan warfare because there is no central authority to resolve these conflicts. The one big difference between Somalia and Shasta County is, of course, that in the former there really isn’t the state, whereas everything that happens in Shasta County happens under the shadow of the state. For example, if a group of ranchers decide that these informal social norms aren’t working for them and take up guns and shoot some of the farmers, they know that it will be the US marshals coming after them.
As a general rule, and this is consistent with the Hayek quote you started with, no civilization has flourished economically, and I would also say socially, without a state powerful enough to provide security, property rights protection, dispute resolution and some amount of public goods to its citizens. It is also the case, and this is something we emphasize a lot throughout Why Nations Fail, that most states throughout history and even today serve the interests of the political elite and are part of their economic problems, not their solution. But this is not because the state is unnecessary or evil, but because of who controls it and what capacities it has invested in and developed.
We are trying to push this perspective to shift the debate from one of whether the state is doing too little or too much in general, to one of how it is that we can get the best out of the state. The answer is fundamentally a political one. We cannot benefit from so many things we take for granted without a powerful state, but then civil society and our institutions need to be even more powerful in order to be able to control the state, particularly since a capable state in a complex society could be a formidable tool of extraction that countless politicians, bureaucrats and organized interests would want to use it for their own benefit or agenda. Put differently, trying to dominate society is in the DNA of the state, but this is no reason to belittle how much of our security, prosperity and even social development we owe to state institutions.
DSW: Right! One contribution of evolutionary biology is to push this scenario back to the dawn of our species. Most primate societies are despotic and extractive in human terms. Our distant ancestors managed to control the ambitions of its most powerful members, or to establish a system of reverse dominance, as Christopher Boehm puts it in his books (1,2). Just about everything distinctively human flows from the benefits of inclusiveness that reverse dominance brings. Then the same eternal conflict between within- and between-group selection took place among human societies during the long sweep of human history, leading to the relatively cooperative mega-societies of today, as recounted by Peter Turchin in his new book Ultrasociety. Before continuing, I wonder if you could comment on what the long evolutionary view and an explicit theory of genetic and cultural multilevel selection adds to your own background in historical and institutional economics.
DA: Great question. I wish I knew the answer fully.
In any case, here is a, perhaps unusual, view.
I don’t think we can understand modern society purely or even largely appealing to its evolutionary roots in the savanna or in the context of small-scale societies. This is because what defines a lot of modern society is state-society relations, and the state, as we understand and conceive it today, did not exist during the long duree of our evolution. Let me try to explain this with an example. Imagine that somebody you trust quite a bit, say your uncle, comes to you and says that he wants to see your bank accounts and all of your transactions going back four years. You would probably balk at the idea. However much you used to trust the guy, there must be something fishy if he wants to see so much of your bank account and private life. But imagine the state, in the form of the tax authority, does this. You would probably not be happy about it, but you would consent, and your trust in the institutions of the state as a whole would not be dented. In Denmark, where trust in the state is even more ingrained, this information is available to the state without even having to ask you. Why am I proposing this thought experiment? Because it illustrates that we have much more trust in the institutions of the state than even the people who are very close to us (and of course this is absolutely not true if you live in much of sub-Saharan Africa, Central America, the Andean, or much of South Asia for a good reason, this trust in state institutions has, understandably, not formed in these societies).
I don’t think this is easy to understand with the existing theories of evolutionary biology, evolutionary psychology or even group selection. Though it’s not my place to comment on evolutionary biology and psychology as an outsider, since you’ve asked me to do it, let me add one other thing before wrapping this up. I have read and enjoyed Christopher Boehm’s work. But, to me, it poses a puzzle rather than fitting nicely into our body of understanding. How can we be simultaneously biologically so well prepared for being cooperative and egalitarian, while at the same time we are also clearly so well prepared to be despotic, hierarchical, murderous and “extractive” (borrowing a term from Why Nations Fail)?
One possibility, which I find very plausible and unifying, is that what evolution has endowed us with is a set of modules. Then it’s a great survival strategy to be able to tap into different modules and go with it. Some of those modules emphasize egalitarian cooperative behavior, while some others emphasize taking orders in a hierarchical situation, especially when that hierarchy is maintained by force or threat of force; some others emphasize the ability to be despotic and extractive, and yet others tap into hatred, murderousness and violence. Being one of these things is probably inferior to having a flexible set of modules for being able to adapt to one’s environment. If you are in a small-scale society run by a despot, it’s probably better for you and your family to be obedient and respectful than egalitarian and cooperative by nature. If you happen to be in the inner circle of the despot, then a natural proclivity to giving orders and exploiting others would come in handy. But if you are in an egalitarian situation without a clear hierarchy backed up by force, then all we know from your work and others on group selection being cooperative yourself would be quite beneficial when you take all of the payoff consequences into account.
This is probably not entirely contradictory to some parts of modern thinking in evolutionary social science, but I haven’t quite seen it expressed in this way and its consequences drawn out. The most important consequence for me is that we really have to find the right institutions and social relations to bring out the right modules in humans.
DSW: Thanks for these candid thoughts. I think that your vision comes close to dual inheritance theory, as expounded by Richerson & Boyd, Henrich, Turchin, Jablonka & Lamb, Paul, and others. The genetically evolved mind provides a large number of building blocks for cultural evolution to act upon, although the building blocks are not quite the “modules” imagined by some evolutionary psychologists (interested readers should go here for more on that topic). The reverse dominance mode of social organization is an addition to the much more ancient dominance mode that predates our species, so we are primed to operate in either mode, as you say. Insofar as every culture is an independent evolutionary experiment, building blocks get assembled in different ways. The products of cultural evolution include institutions, norms, etc., that are essential for the operation of any given society and that replicate through non-genetic means. Most of this work has taken place only during the last two decades so it’s new for everyone.
Returning to the focus of our interview, if I understand you correctly, a leviathan worth wanting must possess the following features. First, it must be strong enough to create capacity. Second, it must be inclusive enough to create capacity for the common good. Even when these conditions are met, however, there is the question of how to create capacity in a large-scale social system that is very complex. Centralized planning won’t work. Totally unregulated markets won’t work. So what will work?
DA: Yes, you have hit the nail on its head. It must be strong enough to create capacity, but inclusive enough so that these are the capacities to protect the citizens, public goods, enforce laws in a way consistent with the rule of law, and undertake the right type of regulation. And this requires inclusivity, and strong controls on the state, less it will go in its usual business of dominating, repressing and exploiting others. That’s exactly why James Robinson’s and my new work departs sharply from the consensus in political science and sociology about the importance of first building a leviathan with an unrivaled monopoly of violence. Once you do that, you have the card stuck against going in an inclusive direction: not much of the resistance to the state is left in society, and then it will be quite difficult to build a powerful civil society, accountability and checks against the state and its agents.
DSW: I’m reminded of two of my favorite examples in Why Nations Fail. Power had to be wrested from the monarchy before England could become an inclusive society. And the first British colonies in America were forced to become inclusive (unlike the Spanish colonies in Central and South America) because the lower ranking members had the option of leaving and becoming pioneers.
DA: My answer to your question of how to create capacity very much builds on this observation. It is not an engineering problem. That’s why when it is approached like an engineering problem, like something we can design and impose on society as it was done in Somalia, Iraq or Afghanistan, it doesn’t work, for powerful segments of society will resist it. So yes indeed, central planning doesn’t work, but not only for the reasons that Hayek emphasized (that a central plan can never aggregate the information, wisdom and creativity of society). It doesn’t work also, and perhaps more majorly, because the central plan also creates a particular distribution of political power in society, based on command and control. Once you have that, you have already created a platform for exactly the worst type of state-society relations, and everything else will unravel following it. The same thing can be said for unregulated markets, because sometimes they concentrate power in the hands of a few businesses and families that start with political power, privilege or the right sort of assets. But the healthiest sort of regulation doesn’t come from above, because some bureaucrat deems it necessary, but it comes from the bottom-up demands of regular people for protection or for the right sort of level playing field for them to go ahead in life.
This is why, I would say, there’s a huge difference between our view and the classic interventionist views (for example, associated with economists such as Keynes, and more recently Krugman or Stiglitz). For every intervention that is on the table, one should do a cost-benefit analysis not just in terms of economic gains and losses, but in terms of political factors. Does this make it more likely that the control of civil society, extant social norms and institutions over politicians, bureaucrats, security services, and elites will be eroded or even perhaps irreparably damaged? This is perhaps a conservative test, but a test I would never want to give up for temporary, short-lived economic gain.
DSW: This is very much in keeping with multilevel selection theory and the concept of major evolutionary transitions, which requires the suppression of disruptive self-serving behaviors within a group before the group can function as an adaptive unit. This is true at any scale, from a hunter-gatherer group to regulation at the planetary level. Which current nations are doing the best job as benign leviathans in your opinion? Also, can the same analysis be performed at the scale of the 50 states within the Unites States? I have mind graphs from The Spirit Level, a book that deserves to be read alongside Why Nations Fail and Ultrasociety, in which their analysis of states within the US conforms well to their analysis of nations. Could the scale of analysis be pushed down even further?
DA: I would point to Scandinavia and Canada as powerful leviathans that are nonetheless subject to the control of society, norms and institutions.
And yes, absolutely, this analysis can be applied to states and even lower-level polities. In fact, a lot of services today in the United States, in much of Latin America or India are provided at the municipality level, and the politicians that citizens and voters have to control are first and foremost their mayors and local politicians and policemen. A lot of my research, and research by other political economists today, is about these subnational-level politics and economics.
But this decentralization, though generally useful and empowering for society, also has a dark side. It can be a way of weakening the state or maintaining the weakness of the central state. If you look at the United States, for instance, many of its most salient problems are a consequence of two centuries of state weakness, and by that I mean both weakness of the federal state and also weakness of all state institutions that individuals interact with. So as a result, you still have extreme poverty, very low quality education and low social mobility in much of US South today. As a result, you have wanton police brutality against our African-American citizens, which the most powerful president on earth can do nothing about. Of course, one has to understand why that state weakness emerged and persisted in the United States, and some of it was a bargain that handsomely paid off in other respects. But today we are also paying the price for that state weakness.
DSW: I think of this as the cultural equivalent of multi-cellularity. A multi-cellular organism is composed of trillions of cells that must be healthy at the cellular and organ levels for the multi-cellular organism to be healthy. In the same way, for a large-scale human society to work well, it must be organized as smaller-scale units that work well and are properly coordinated for the benefit of the whole. This is a daunting task that has been accomplished largely by unintended cultural group selection in the past, as Hayek was wise to note. But it needs to take place through intentional cultural evolution now more than ever before, realizing that this doesn’t mean command and control. I think that Vincent and Elinor Ostrom were reaching in the same direction with their concept of polycentric governance.
So, you’ve distinguished your position from both the command and control perspective associated with Keynes and the unregulated market perspective associated with Hayek. Is there a third way and is there any hope of implementing it in the current American political environment (you’ve already pointed to Canada and the Scandinavian nations as exemplars)?
DA: I like this analogy to a multi-cellular organism. But there are several key differences. First, it’s rare for a higher-level cell to pursue a strategy of total exploitation that will entirely decimate the lower-level cells. But it happens in the context of human relations. Think of Caribbean plantation colonies, such as Barbados or Haiti, in the 17th and 18th centuries. These places were some of the richest in the world, but more than 80% of the population, the slaves producing sugar and other valuable commodities, lived under such harsh conditions and with such low incomes that a good share of them died before the age of 30. This is by no means an unrepresentative picture of extractive institutions when they are unchecked. Second, our lives cannot be made sense of without the institutional framework under which we live — which might be fairly well-functioning institutions like the ones we are used to in the Western world or institutions supporting extraction such as those in the Caribbean plantation colonies. Third, I think these institutions are also central for making sure that the smaller-scale units work well, are coordinated and their information and inputs are transmitted to the higher levels. We are the only life form on earth whose existence is so much intertwined with institutions and how they function.
This also gives me an opening for answering your question. I think there’s always a third way. The state and its institutions are some of our most sophisticated creations, and some of our most dangerous ones. Many things we depend on today, and many more we take for granted such as law and security, emanate from these state institutions, but also the history of the state is the history of murder, genocide, war, repression and exploitation. The third way is, broadly and loosely speaking, any arrangement that controls these abominable aspects of the state while still trying to benefit from the wonderful things that it has made possible. James and I call it “inclusive state”, but it’s an ideal type, not a reality. All states have their dark side, even the Canadian and Scandinavian ones I mentioned as exemplars of better practice in this respect, and as I have already noted as well, it’s always a work in progress.
Is it possible to make progress towards this inclusive state in the United States at the moment? I would’ve said yes 15 years ago, 10 years ago, 5 years ago, but today I do feel more pessimistic than ever about the United States and about the world. Of course, I’m not surprised that there is a huge amount of discontent among some segments of the voting public, and some of this is entangled with fear from and hatred against immigrants and minorities. But the extent of this hatred has been a shock to me. How accommodating our general discourse has been to this adds insult to injury. It’s not only that. The polarization and gridlock in Washington cannot but make one pessimistic about the prospect of any positive institutional change. When the political system doesn’t work, sometimes protests and pressure from civil society force it to work. But we have seen in the United States that that doesn’t go anywhere either. (And the situation in the world at large makes it easy to be pessimistic about everything political today).
Of course, we should not lose hope, and in the past, US institutions have shown an amazing ability to self-reform and change, for example, on the issue of slavery, then during the progressive era, then in the context of machine politics and corruption in the cities, and then for the civil rights struggle. Perhaps it can happen again. Perhaps we can still hope.
DSW: Perhaps a clear theoretical framework, which I think is emerging thanks to people such as you and your colleagues, will contribute to solutions. This has been a great conversation and best of luck with your endeavors.
DA: Thank you very much David. It’s been both fun and instructive for me. I was just getting used to this conversation. I will miss it. Until next time.
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