Tuesday, January 15, 2008

Further on Democracy and Economic Growth

by Ken Houghton

If you're inclined (as I am, no matter what I said earlier) to accept the old Winston Churchill declaration that "It has been said that democracy is the worst form of government except all the others that have been tried," then it becomes necessary to explain why democracy, in the British sense especially and the U.S. sense in large part, largely developed on the backs of colonization (extracting excess rents from people due to asymmetrical information at best, brute force at worst).

Mark Thoma points us to Eric Rauchway's review of Power and Plenty, and lays out the rules:
The logic of counterfactualism is simple, though it remains surprisingly controversial: If you want to say what's good and bad in history, you can't just apply your judgment, but must rather explain what the better or worse alternative might have been. It's not enough to declare that (say) the United States shouldn't have taken the Philippines; one has to argue that had the U.S. refrained, a better x would likely have happened and the worse y would not have. The counterfactualist argues not from absolutes, but from costs and benefits. Ferguson, for example, used the method to argue that the world was better off for the British Empire. (The crude version: You wouldn't want to get colonized by Germany, would you?)

Read the whole thing, but the money quote (for the current subject) comes here:
Even if elements of this story seem familiar, Findlay and O'Rourke tell their tale exceptionally well and give lively attention to alternate possibilities: What should have happened, according to theory? What could have happened, in the realm of plausibility? They find they can cede little to neoliberal economists: Power was generally necessary to secure plenty. "Adam Smith and his liberal followers to the present day, however, would, and have, argued that much of this [state] expenditure was wasted, unnecessarily crowding out more productive private investment. The assumption of course is that the markets and raw material supplies ... would have existed regardless"--which, history suggests, they would not have. Had your empire not secured them, your neighbor's would have, with lasting bad consequences to you. [emphases mine]

If I'm reading this correctly, the only way that economic growth thrives in a democracy is by exploiting an underclass, either directly (colonies, slavery) or indirectly (answering the age-old question of why tropical foods are underpriced).

The other way that worked for a while in the United States (and may still be) is expansion of human capital. The 20th century growth is the story of two things: a three-fold increase in high school graduation rates and the moving of women into the work force* (the latter paralleling but lagging the move from labor-intensive agrarian populace to manufacturing, to be certain).

But there are only so many women, and only so much education that can be viewed legitimately as "investment." Perhaps greater returns are realised from other forms of governance?

*It also reduced the Pigouvian Paradox—the man who marries his housekeeper reduces GDP, even though her efforts on his behalf likely increase.

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