Realism, Ideology, and the Convulsions of Democracy (Studies in Public Choice, 44) 3031394577, 9783031394577

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Studies in Public Choice

Mikayla Novak Marta Podemska-Mikluch Richard E. Wagner   Editors

Realism, Ideology, and the Convulsions of Democracy

Studies in Public Choice Founding Editor Gordon Tullock

Volume 44 Series Editor Randall G. Holcombe, Department of Economics Florida State University Tallahassee, FL, USA

The Studies in Public Choice series is dedicated to publishing scholarship in the field of public choice and constitutional political economy. The series includes research monographs, edited volumes, textbooks, and reference works in all areas of public choice and constitutional political economy. Theoretical models of political processes, empirical studies, and case studies of political processes and events fall within the scope of the series, as do volumes analyzing the impacts of political decision-making on public policy. Public choice has been well-recognized as an interdisciplinary area of academic interest, but public choice analysis often has been absent in public policy studies. Applications of public choice to subfields such as macroeconomic policy, health policy, income security policy, and other public policy areas are welcome. The target audience of the series is broad, ranging from academics to policy practitioners. Projects submitted to the series undergo evaluation from the series editor at the proposal and manuscript submission stages. Additional rounds of peer review may be required at the series editor’s discretion.

Mikayla Novak  •  Marta Podemska-Mikluch Richard E. Wagner Editors

Realism, Ideology, and the Convulsions of Democracy

Editors Mikayla Novak Mercatus Center at George Mason University Fairfax, VA, USA

Marta Podemska-Mikluch Department of Economics Gustavus Adolphus College Saint Peter, MN, USA

Richard E. Wagner Department of Economics (Emeritus) George Mason University Fairfax, VA, USA

ISSN 0924-4700     ISSN 2731-5258 (electronic) Studies in Public Choice ISBN 978-3-031-39457-7    ISBN 978-3-031-39458-4 (eBook) https://doi.org/10.1007/978-3-031-39458-4 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Paper in this product is recyclable.

Preface

The democratic style of public governance is being stress-tested by a variety of interrelating forces and trends. Growing differences in political attitudes and ideologies are said to increasingly contribute toward polarization among citizens. Cultural and identity factors which prima facie seem incommensurable are regarded as a politically salient phenomenon. Community frustrations appear to be building over the perceived inability of leaders, and other key political figures, to address a range of crisis situations and seemingly wicked problems – including low growth and high inflation, climate change, widespread drug addiction, geopolitical tensions, and more. Consequent to the combinatorial nature of these issues, and more, it is perhaps unsurprising that opinion polling has shown a disconcerting level of disenchantment, or a loss of faith, in the capability of democracy as a mode of governing together. This book examines what is arguably a more fundamental form of tension in the workings of contemporary democracies. The human faculties of reason may inspire a scientific basis for enacting policy changes, or the human proclivity toward sentiment may animate key activities within the political domain. Reason and sentiment; Ying and Yang. These are, surely, motivating impulses within our shared democratic political existence, but they are at tension. Essentially, the tension is between reconciling the power of our reason with the pull of our sentiments as guiding features of human political association. As noted by generations of classical liberal thinkers, for example, the domination of any of these two guiding principles is likely to lead to significant losses of human freedom and important values that go with it, such as autonomy, dignity, equality, justice, and respect. Democracies are characterized by a myriad of political agencies, offices, roles, and responsibilities, and even those who raise doubts about democracy in contemporary debates would presumably want to keep it that way. Even under democratic arrangements of “We The People,” the reasoned technocratic or the sentimental preacher may occupy determinative political positions. A key problem is that if the desire by either the reasoner or sentimentalist to wield power as a blunt tool of control over others takes hold, democracy is at great risk of failing to deliver, in promise or in deed. Reason and sentimentality are at risk of imbalance, with significant v

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implications not only for the operation of political systems but for economic, social, and cultural systems upon which we all rely. This edited collection of essays consists of inquiries into the democratic tensions between reason and sentiment by experts in economics, political economy, philosophy, and related disciplines. One common thread is the pursuit of scholarly investigations through the framework of entangled political economy, originated by Richard E. Wagner and now the subject of lively research (including through the Entangled Political Economy Research Network). The entangled attribute of political activity, especially as it intersects with commercial enterprise, illustrates how arbitrary projections of political authority induces its own tensions with the animating spirit of markets, which is geared toward productive entrepreneurship in the pursuit of profit. As the essays in this book attest, the ethical and moral implications of imbalance in political reason and sentiment poses as pressing concerns with respect to the survivability of democratic norms. Fairfax, VA, USA  Mikayla Novak Saint Peter, MN, USA  Marta Podemska-Mikluch Fairfax, VA, USA  Richard E. Wagner

Acknowledgments

We are grateful to the Institute for Humane Studies for providing us with the Discourse Initiative Research Grant that made this volume possible.

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Introduction

A group of scholars who uphold classical liberal views have been brought together in this publication to delve into the main tension that arises within democracies: a tension between reason and sentiment. The opening two chapters of James Burnham’s 1944 book, The Machiavellians, brilliantly articulated this tension. The first chapter employed Dante to convey the idea that the aim of politics is desire, while the second chapter employed Machiavelli to suggest that the goal of politics is to attain power. This contrast between reason and sentiment, between power and wish, continues to escape comprehension. It is easy enough to observe this contrast. It is not so easy to discern the source of that contrast, let alone to articulate the contours of that contrast. The articulation of those contours, however, are essential if we are to escape the debilitating and destructive results of failure to recognize and understand those contours. Within the present age, for instance, any criticism of voting mechanics elicits a flurry of screams about being anti-democratic. From another standpoint, the articulation of formal (including constitutional) rules for politico-social order face withering criticisms to the effect that such provisions subvert the exercise of democratic impulses. Nancy MacLean’s widely embraced denunciation of James Buchanan’s body of work in 2017 in Democracy in Chains reflects the triumph of a particular form of sentiment over reason. A realist treatment of electoral democracies can be found in Richard E. Wagner’s 2016 Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy. In exploring why democracy is a difficult form of government to maintain, Wagner attributes the challenges of distinguishing between reason and sentiment to treating choice and consequence as one and the same. By separating choice from consequence, Wagner distinguishes between environments that offer immediate feedback (e.g., markets) and those where feedback might be delayed or absent (e.g., religion or politics). As Wagner argues, appeals to emotions are likely to play a much stronger role in environments characterized by a loose connection between choice and consequence and are at the core of the degenerative forces that undermine democracies and lead to a decline of liberalism.

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Introduction

Recognizing that institutional environments differ in how tightly action is connected to consequences, we see no direct gain from trying to entice people to use their reason more fully. The dominance of sentiment over reason is baked into the social cake as David Hume explained and Vilfredo Pareto amplified in distinguishing between logical and non-logical environments. Our embracement of Pareto’s distinction between logical and non-logical environments sets us apart from the neoclassical public choice and its attribution of democratic failures to voters’ ignorance. With its closed-ended models, public choice presumes that knowledge is complete and available and that perverse incentives prevent voters from becoming informed. In contrast, embracing incompleteness and subjectivity of knowledge, we see the challenge to democracy in the epistemic structure that muddles testable and aspirational propositions. It is not so much that voters are uninterested in becoming informed; it is that there is no mechanism to verify aspirational political promises. The choice to support a particular political movement, or to acquiesce to the status quo, is less about voters’ expectations about the future and more about affect, and a sense of belonging, that political speech produces currently. The approach we suggest here is not new, it is political economy as it was practiced before the emergence of neoclassical economics. Fittingly, the book opens with Richard Wagner’s presentations of entangled political economy (EPE) as an effort to resurrect and advance the main contributions of classical political economy. EPE shares the explanatory focus on social life and social organization that defined political economy before its transformation into economics in the second half of the nineteenth century. For Wagner, it is this social focus that distinguishes classical political economy from neoclassical economics, not marginal analysis, as is commonly believed. Adam Smith, and other classical political economists, were primarily interested in understanding the origins and formation of social phenomena. Wagner refers to their style of theorizing as invisible hand theorizing. In these accounts, social cohesion emerges from the desire to be well-regarded in society. As political economy morphed into economics, and as optimization techniques came to dominate its analytical toolset, resource allocation moved into the foreground of analysis. This shift made it impossible to continue the invisible hand theorizing. When all human action is reduced to utility maximization, no room is left for the non-quantitative measures of well-being, be it approbation, jealousy, or other fellow feelings. Neoclassical economics, purportedly a continuation of classical tradition, emerged not as a social science but a science of rational administration: an effort to aid decision-makers in maximizing value of the scarce resources under their control. Doing so political actors, as Wagner observes, invites an analytical sleight of hand: ideology must be invited to explain why political actors would pursue public good. In the effort to resurrect the exploratory focus on social relations, EPE finds much inspiration in the Italian public finance scholarship. Italian thinkers of the nineteenth century also sought to bring political action within spontaneous order theorizing. EPE seeks to advance these insights with the tools of complexity and systems theory. By enabling systems-based thinking, these tools are far more

Introduction

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suitable for the exploration of social interactions and the phenomena they generate than the optimization calculus of neoclassical economics. In the second chapter, Giampaolo Garzarelli, Lyndal Keeton, and Aldo A. Sitoe investigate whether the principle of duality can be usefully applied to the relationship between liberty and coercion, and the distinction between muscular and sentimental liberalism. Is maximization of liberty, which they argue is the goal of sentimental liberalism, equivalent to minimization of coercion; muscular liberalism? The authors take on this question from two perspectives: closed-ended modelling of additive political economy and open-ended modelling of entangled political economy. Closed-ended modelling presumes scalability of interactions—society, or polity, is simply a multiplication of individual interactions; social outcomes can be directly derived from individual choice. Size of society is irrelevant, as multiplication does not change the quality of interactions. On the other hand, in the open-­ ended approach, with partial interactions and incomplete, continuously changing knowledge, interactions are non-scalable and social outcomes cannot be directly inferred from the logic of choice. In the first case, in the absence of genuine social interactions, coercion and liberty can be presented as a trade-off. Once we allow for incomplete social interactions, as is the case in the non-scalable model, coercion must be employed to minimize coercion. The world of no coercion is not the world of liberty, it’s the world of chaos. If it is coercion that permits liberty, then liberty should be interpreted as a function of coercion, not its dual. This leads the authors to conclude that survival of liberalism depends on minimization of coercion and not maximization of liberty. In the third chapter, James Caton provides a framework for analyzing the emergence of a pluralist, liberal order. Social contract—the term Caton uses to describe the structures and processes that govern and mediate individual plans, thoughts, and behaviors—is generated through negotiations, also known as bargaining or public discourse, among all participating community members. Community members contribute to the public discourse continuously by exchanging speech acts. Hence, there is no one constitutional moment in which the social contract is established; rather, there is an infinite series of constitutional moments that evolve the social contract. Caton focuses his analysis on the development of pluralism in pre- and post-­ Reformation England and argues that it was the emergence of ideological diversity that enabled the English Reformation and subsequently led to the widespread adoption of a liberal worldview. Prior to the Reformation, ideological unity was maintained through a suppression of dissidents. But that suppression could never be complete. Dissident voices, general allowance for expression of belief in private, and local autonomy expressed by participation in ecclesial life were important precursors that would support diverse expression during the post-Reformation era. Caton substantiates his careful analysis with data from Google Ngrams that show a changing use of public discourse language. Starting in the sixteenth century, and until the end of the eighteenth century, words associated with virtue, liberty, and commerce appear with growing frequency, suggesting an increasing interest in these domains of social life.

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In chapter “The Emotional Decay of Liberalism: Trust, Polarization, and Affective Looping”, Kevin Vallier analyzes a process through which declining social trust, and ensuing polarization, might bring about a collapse of a liberal order. Vallier defines social trust as a widespread observance of moral rules. Social trust is critical for a liberal society as it enables cooperation with diverse strangers. When social trust declines, it is no longer possible to trust diverse strangers. As we turn toward those with whom we share similar beliefs, liberalism regresses into tribalism. Vallier explores the threats that decline in social trust presents for liberalism in the model of affective-cognitive looping. Trust grows when we observe that others act in compliance with moral rules. But compliance is not always easy to determine, often, there is ambiguity as to whether particular behaviors are compliant or whether they violate the norms. Ambiguity calls for interpretation and interpretation draws on prior beliefs. If we believe a stranger to be untrustworthy, we will interpret their actions as untrustworthy. And if we believed a stranger to be trustworthy, we will interpret their actions as trustworthy. By biasing the interpretation of ambiguous observations as violations, the initial affective distrust turns into cognitive distrust. This deepens polarization, which further amplifies distrust. Vallier concludes by advocating for norms and policies that enable displays of trustworthiness. At the same time, since affective-cognitive looping describes a disconnect between action and consequences, Vallier’s model suggests that the impact of such norms and policies will be modified by the institutional environment in which they emerge. In chapter “From Entangled Political Economy to Civil Association: A Difficult Journey”, Laurent Dobuzinskis critically considers the treatment of sentimentality in the works of Italian elite theorists and James Burnham, as well as in contemporary entangled political economy literature. Raising questions over the extent to which the generation and propagation of political sentiments can be interrogated through the prism of strict rationality, Dobuzinskis provides a useful reminder that adherence to certain norms and values help to contain rent-seeking behaviors and to repel corruption and, as a result, confer legitimacy in the political system more broadly. The operationalization and pursuit of key political ethics, such as honor and integrity, may be framed as being in accordance with an “enlightened self-­ interest” that has animated a longstanding tradition in political thinking, including for Adam Smith and Michael Oakeshott. Dobuzinskis identifies a range of additional values seen to be synonymous with the maintenance of a liberal political order, exemplified by reciprocal exchanges amongst democratic equals. Fairness stands prominently in this respect, with this value (or, more accurately, perceived departures from fairness) informing debates over the redistributive state that have long been the interest of entangled political economists. The terms and conditions of redistribution in many Western countries have inflamed political tensions between taxpayers and beneficiaries, also assuming an intergenerational dimension as economies stagnate and populations age. In his chapter, Dobuzinkis recommends a shift in fiscal entanglements toward “pre-­ distribution” to help avert a further decline in perceived fairness and, conversely, repair legitimacy of political systems already suffering great reputational strains.

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Rosolino Candela (chapter “Toward a Constitutional Theory of Property Rights to Escape the Transitional Gains Trap: A View from the Machiavellians”) provides a historical-institutional perspective on economic development, and the reconceptualization of elite activities and functions in a manner supportive of long-run material prosperity. In this chapter, Candela articulates the thesis that economic and political entanglements co-evolved, originally in Western Europe and then beyond, in a pro-­ prosperity direction with crucial support given by the constitutionalized protection of property rights. Assimilating the thought of James Burnham into the framework of entangled political economy, Candela supposes that property rights protections manifested the dulled preferences on the part of elitists to wield violence as a measure to extract rents from productive economic agents. Not only does Candela indicate that the personalities comprising the elite obviously change intertemporally, but that such elites engage in competitive processes with respect to access and control over the coercive means that is politics. This understanding reflects a scholarly literature in political science, sociology, and similar disciplines. Candela goes further by delving into a rich literature of institutional economics, public choice, and entangled political economy in showing how elite competition was implicated in the development of institutional and policy infrastructures – such as property rights protection, rule of law, non-discriminatory public goods access, and competitive taxes  – that incentivized entrepreneurship and innovation by the masses, and dignified material accumulations. It is shown that an entangled political economy approach describes the modernist experience of societies avoiding transitional gains traps in ways that have been politically profitable to both elitists and non-elitists. David Hebert and Nicholas Arnold contemplate the incidence of affect and symbolism within the domain of political action (chapter “Mr. President, Tear Down This Fence”). Specifically, they ask to what extent sentimentalist rationalizations for constitutional rules, and for their change, are at odds with reason in constitutional argumentation. Hebert and Arnold suggest that sentimentality in on the march in politics, including at the constitutional level of interaction. The elemental reasons for the observed bias in the application of emotions, sentiments, and symbols in a constitutional context are twofold. The first is that political action is generically weakly constrained relative to economic action, due to an array of factors such as voter ignorance, rule ambiguity, and so on. The second reason is that the projection of sentiment provides ample opportunities for political actors to discover ways to evade or reinterpret the strictures of constitutional rules and, through it, enhance their relative influence and power. Hebert and Arnold apply their insights to the evolution of procedural and other political rules applicable to the federal level of US public administration. It is on the floor of the House of Representatives or the Senate that legislators embrace sentimentalist rhetoric to persuade their peers to cast aside the “nuisances” of rules in order to achieve utopic policy perfectibility. The authors add to the entangled political economy approach by highlighting the potential influence of political sentimentality upon corporate domains, wherein the managers of politically connected

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enterprises, likewise, learn to articulate sentiments in order to protect their economic positions against competitors. In chapter “Economic Efficiency and the Quest for a More Just World”, Vlad Tarko appraises the ethical and moral prerequisites of a functioning liberal economic-­political order, an order that is inherently respectful of differences in interests, preferences, and worldviews. In economic philosophy, the Pareto and Kaldor-Hicks criteria are forwarded as common standards of welfare, but, as Tarko demonstrates, these normative criteria may prove unsatisfactory considering disagreements over preferences as well as the persistence of unjust states of the world. The need to diverse people to be able to live in accordance with their own lights, and to do so without branching out in conflict and outright destruction, remains as pressing as ever. Based on these investigations, Tarko considers an array of institutional reforms which aim to ameliorate ethical and other value-laden conflicts concerning allocational and distributional preferences. Specifically, he advances a defense of polycentric public governance arrangements (namely, federalism) as well as auction-based political decision-making rules which have become conceivable in the wake of technological advances. These are posited as mechanisms to help avoid conflictual intransigencies that presumably arise when certain decisions, informed by the holistic imposition of welfare criteria, are applied to all members of society. In this vein, Tarko outlines an institutional argument for toleration that is evident throughout the lineage of classical liberal political economy from Adam Smith to Frank Knight to James Buchanan and through to Richard Wagner. Recognition of politics as a realm of non-logical action is a promising starting point in advancing our understanding of electoral democracies. Given the many systemic obstacles that contribute to the strength of status quo bias, departures from additive political economy are bound to be challenged, or even discouraged. The road ahead is unlikely to be easy and the set of diverse chapters collected in this volume exemplifies the challenges embedded in bringing the political within spontaneous order theorizing. However, while contributors differ in their embracement of entangled political economy, each chapter suggest numerous fruitful pathways for further inquiry.

Contents

Social Science, Administrative Science, and Entangled Political Economy��������������������������������������������������������������������������������������������    1 Richard E. Wagner  Duality, Liberty, and Realism in Entangled Political Economy������������������   17 Giampaolo Garzarelli, Lyndal Keeton, and Aldo A. Sitoe Community, Pluralism, and Public Reason: An Entangled Analysis of Early Modern England����������������������������������������������������������������   41 James Lee Caton Jr The Emotional Decay of Liberalism: Trust, Polarization, and Affective Looping��������������������������������������������������������������������������������������   65 Kevin Vallier Toward a Constitutional Theory of Property Rights to Escape the Transitional Gains Trap: A View from the Machiavellians��������������������   83 Rosolino A. Candela From Entangled Political Economy to Civil Association: A Difficult Journey������������������������������������������������������������������������������������������   97 Laurent Dobuzinskis  Mr. President, Tear Down This Fence������������������������������������������������������������  113 David J. Hebert and Nicholas M. Arnold  Economic Efficiency and the Quest for a More Just World������������������������  129 Vlad Tarko

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Editors and Contributors

About the Editors Mikayla Novak  is a senior fellow of FA Hayek Program for Advanced Study in Philosophy, Politics, and Economics, at the Mercatus Center at George Mason University. Novak is the author of two books and over 20 peer-review articles, a number of which apply the entangled political economy framework to economic, social, and technological phenomena. Novak earned her PhD in Economics from RMIT University, Melbourne, Australia, in 2013. Marta  Podemska-Mikluch  is an associate professor of Economics at Gustavus Adolphus College. Using the analytical approach of entangled political economy, Podemska-Mikluch’s research analyzes the role entrepreneurship plays at the intersection of divergent institutional settings and the role regulations play in fostering and curtailing innovation. Podemska-Mikluch co-­founded the Entangled Political Economy Research Network in 2020. EPERN is a network of more than 90 scholars interested in advancing the novel approach of entangled political economy. Podemska-Mikluch earned her PhD in Economics from George Mason University in 2012. Richard  E.  Wagner  is a professor emeritus of Economics at George Mason University. He has authored some 30 books and 200 journal articles across various subjects in economic theory and political economy. Before arriving at George Mason in 1989, he served on the faculties of Florida State University, Auburn University, Virginia Tech, Tulane University, and the University of California at Irvine. After completing his undergraduate work at the University of Southern California in 1963, he received his PhD at the University of Virginia in 1966.

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Editors and Contributors

Contributors Nicholas M. Arnold  Aquinas College (student), Grand Rapids, MI, USA Rosolino A. Candela  Mercatus Center, George Mason University, Fairfax, VA, USA James Lee Caton Jr  Department of Agribusiness and Applied Economics, North Dakota State University, Fargo, ND, USA Laurent Dobuzinskis  Department of Political Science, Simon Fraser University, Burnaby, BC, Canada Giampaolo  Garzarelli  Department of Social and Economic Sciences (DiSSE), Sapienza – University of Rome, Rome, Italy David J. Hebert  Economics Department, Aquinas College, Grand Rapids, MI, USA Lyndal  Keeton  IPEG, SEF, University of the Witwatersrand, Johannesburg, South Africa Aldo  A.  Sitoe  IPEG, SEF, University of the Witwatersrand, Johannesburg, South Africa Vlad Tarko  Department of Political Economy and Moral Science, University of Arizona, Tucson, AZ, USA Kevin Vallier  Department of Philosophy, Bowling Green State University, Bowling Green, OH, USA Richard  E.  Wagner  Department of Economics (Emeritus), George Mason University, Fairfax, VA, USA Independent Scholar, Tallahassee, FL, USA

List of Figures

Duality, Liberty, and Realism in Entangled Political Economy Fig. 1 Scalable interactions���������������������������������������������������������������������������  22 Fig. 2 Non-scalable partial interactions���������������������������������������������������������  23 Fig. 3 Predictability and explanation�������������������������������������������������������������  24 2 Fig. 4 Liberty and coercion as a dual problem in R+ ������������������������������������  25 Fig. 5 Duality of liberty and coercion from another vantage point���������������  27 Fig. 6 Liberty and coercion in a polity����������������������������������������������������������  31 Community, Pluralism, and Public Reason: An Entangled Analysis of Early Modern England Fig. 1 Changing use of words relating to virtue, liberty, and commerce Lines represent centered 30 year moving averages. I define each group: Virtuous: honest, honesty, honor, honorable, love, true, truth, truthful, prudent, prudence, temperate, temperance, justice, faith, hope, pious, piety, moderation, integrity, trust, trustworthy, trustful, considerate, responsible, responsibility, charity, justice, courage, courageous, propriety, courtesy, restraint, frugal, frugality, dignity Liberty: liberty, freedom, tyranny, tyrant, liberal, independent, independence Commerce: market, markets, marketing, commerce, commercial, exchange, exchanged, exchanges, exchanging, trade, trader, trading, trades, traded, dealing, deal, dealer, thrift, price��������������������  54 Fig. 2 Changing use of words relating to commerce, frugality, and propriety Lines represent centered 50 year moving averages. Y-axis values are stretched to compare relative changes. Here, the values for “propriety” include only the frequency of “propriety”. The values of “commerce” include the sum of the frequencies for “commerce” and “commercial”. The values of “frugal” include the sum of the frequencies of appearance for ‘frugal’ and ‘frugality’.�����������������������������������������������������������������������  54

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List of Table

Economic Efficiency and the Quest for a More Just World Table 1 Quadratic voting��������������������������������������������������������������������������������  144

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Social Science, Administrative Science, and Entangled Political Economy Richard E. Wagner

In the eighteenth century when the study of economics was getting seriously underway, that study was known as “political economy.” To be sure, intellectual historians have identified such study far back in the written record. In his 1260-page treatise, History of Economic Analysis, Joseph Schumpeter (1954) located the beginnings of the study of economic phenomena in Greco-Roman times. Furthermore, Marjorie Grice-Hutchinson (1952) identified the University of Salamanca in Spain in the Middle-Ages as the origin of the systematic study of political economy prior to the appearance of Adam Smith and the Scottish Enlightenment. All the same, prevailing convention regarding intellectual history credits Smith (1776) with the founding of political economy. Regardless of considerations of assigning precedence in the historical record, political economy began as the study of social organization under recognition that societies entail a coherence that could never be part of some ruler’s intention. Within the framework of contemporary object-oriented programming, it would take at least n + 1 equations to describe a society in the manner of Adam Smith and the classical economists. There would be n equations required to describe the n individuals, including information about the location of each individual within the social division of labor. With n equations, however, all that exists is an aggregation over n individuals. To generate a genuine society, as distinct from virtual society of solipsistic individuals, requires another equation, or even set of equations, that would incorporate the processes and sentiments that carried fellow feeling and related sentiments from person to person, as Wagner (2020) sketches in exploring how a macroeconomic theory might be developed without descending into aggregation.

R. E. Wagner (*) Department of Economics (Emeritus), George Mason University, Fairfax, VA, USA Independent Scholar, Tallahassee, FL, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_1

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R. E. Wagner

Adam Smith (1759, 1776) penned two books that together constituted the beginning of a theory of social organization centered on the eminently reasonable presumption that people choose desired and effective over undesired and ineffective courses of action, if they are free to choose. This presumption later became the rationality postulate of neoclassical economics, but Smith never reduced economics to comparison among quantitative magnitudes. Quantities existed that had measure for sure, but there were also qualities associated with people living together in close geographical proximity that were vital to the qualitative features of social life that were not reducible to measure. Smith’s (1759) Theory of Moral Sentiments was his account of the regularities in human conduct when that conduct was guided by a desire to be well-regarded in society, as against the reduction of individual action a century later to the maximization of utility. It was this integration of self with others that generated orderly patterns inside society within Smith’s scheme of thought, even though there was no person or office in society that directed the members of society as against their directing themselves. Each individual was responsible for his or her conduct and bore the consequences that stemmed from how other people reacted to those actions. People were free to choose their actions, but how they fared in society depended on how other people reacted to their actions. Smith wrote as feudalism and mercantilism were giving way to liberalism. In his better-known Wealth of Nations, Smith (1776) contrasted what he described as the system of natural liberty that was then taking shape in the wake of feudalism’s demise with the mercantile system that had been dominant among the large European empires for some time and which James Stuart’s (1767) Principles of Political Economy stood in sharp contrast to Smith’s liberal system of political economy. For Smith, moreover, social organization and not resource allocation was his prime object of analytical inquiry. While Smith recognized that people sought to be effective in their chosen courses of action, it was the society inside of which people acted and lived that was his primary object of analytical interest. Within the classical period of economic theory that ran from Smith through John Stuart Mill (1848, 1871 7th ed.), political economy was a science of social organization whose members possessed faculties of reason but those members were not reducible to some common scheme of rationality, in contrast to the style of economics deployed starting late in the nineteenth century. In contemporary discourse, it is common to hear people speak of metaphorical glue as something that holds a society together with varying degrees of adhesion. There is, of course, no glue that performs this task. If there is any social equivalent of glue, it resides in such emotions as approbation and admiration which pass among the members of society. The theme of Smith’s Moral Sentiments was that people would act so as to acquire approbation from neighbors and associates which redounded to the benefit of people throughout the society. Among other things, humans often form associations to pursue common interests, and these associations become part of the civic (not political) architecture (Alexander 2006). Smith and the classical economists sought to understand how societies spread or extinguish friendly relationships among the population, and this understanding dealt with something real and immaterial as against being conveyed by some metaphysical

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image of social glue. However such glue might be conceptualized, we might reasonably be skeptical about the ability of such glue to be manufactured through policy measures, as against its emerging as free gifts of nature when people live freely together without the presence of political coalitions injecting domination into social relations. To be sure, it is surely easy enough to understand the attractiveness of connecting policy measures to metaphysical images of glue in an age when the sources of social order seem to be fraying throughout the western world along with the continual expansion of public ordering relative to private ordering within society. On this theme, Marta Podemska-Mikluch and Richard Wagner (2013) contrast dyadic and triadic forms of exchange relationships. Dyadic exchange is the modus operandi of a privately ordered society such as what Harold Berman  (1983) described in his magisterial Law and Revolution and as Richard Epstein (1995) amplified in explaining how the formal framework of exchange can accommodate the most complex commercial patterns the world has ever seen in bringing widely divergent parties together concordantly. In sharp contrast, triadic exchange denotes the construction of political arrangements where invariably deals are made that benefit some people at the expense of others, as reflecting the signature of political coalitions which William Riker (1962) located at the core of democratic politics. It is no wonder that the French philosopher Montesquieu from the time of the Enlightenment advanced the Doux Commerce thesis that commerce exerted a civilizing influence within society through the ability of commerce to weave people together through trade and voluntary organization, and with Norbert Elias (1939) offering a trenchant treatise on the civilizing processes through which infants move into adulthood. Politics cannot lay claims as being central to the promotion of social order due to the simple observation that coalitional politics operates by dividing reality into supporters and opponents of governing regimes, similar to Carl Schmitt’s (1932) recognition of the friend-enemy distinction as providing the locus of political action in society.

Classical Economics: Economics as Social Theory People often remark that “winner’s write history,” to indicate that histories are typically written by those who hold a dominant voice within a profession or society. This is how it went with the replacement of classical economics between Smith and Mill in the eighteenth and nineteenth centuries with the neoclassical style of economics that started late in the nineteenth century. The prime difference between the contrary styles of economic theory was their divergent styles of theorizing about value, as Jimena Hurtado and Maria Pia Paganelli (2022) set forth luminously. It is commonly noted that the classical economists expressed puzzlement over the high value people place on diamonds relative to water when they can live without diamonds but cannot live without water. This diamond-water paradox was dissolved by the advent of the neoclassical style of economics where value was determined not by the entire stock of an object but by a little addition to or subtraction from that

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stock. This attribution of marginal significance came with the importation of the calculus into economics where it was recognized that a modest addition to or subtraction from one’s stock of water will make little difference in the value people place upon their total stock of water, in contrast to the significant increase or decrease in value a modest increase or decrease in one’s stock of diamonds will have. In their careful examination of the diamond-water paradox, Hurtado and Paganelli (2022) unpack the superficial character of the diamond-water paradox in the contemporary presence of computer counterfeiting of art and the challenges of protecting against counterfeiting. Among other things, Hurtado and Paganelli point out that well-being depends on far more than either diamonds or water as compared with such things not explicitly available through market transactions as healthy children who are eager to learn and who attend schools where they are not preyed upon by other students. With the diamond-water paradox not being the lynchpin that distinguishes classical from neoclassical styles of economics, the prime source of difference resides instead in the distinction between economics as social science and economics as administrative science. For Smith and the subsequent classical economists, society as people living together among themselves in close proximity was the central object of economic inquiry. There was plenty of room during the classical period for people to choose the variegated details which they integrate into their individual lives, including their types of employment and housing, patterns of friendship, and charitable practices. All the same, societies reflected coherence in patterns of action without there being some person or office responsible for establishing that coherence. To the contrary, that coherence resided in such things as the types of objects they would like to cook for their tables, clothing they would like to wear, schools they would like their children to attend, and fire stations for which they might volunteer to serve. Why particular patterns of volunteering emerged, patterns of clothing worn, and so on depended on personal preferences in conjunction with the types of favorable reactions that might be elicited from other people. In any case, society was the prime object of economic inquiry in the classical period, with Adam Smith seeking to contrast what he described as the system of natural liberty, which he sensed was in the process of forming in contrast to the mercantile system of political control over social life with which the system of natural liberty was contending. The mercantile system was not vanquished at once but in good measure had disappeared by the mid-nineteenth century, though to be greeted by the emergence of socialism during the same time period. While Henri de Saint-Simon (1760–1825) is generally regarded as the founder of Socialism, Karl Marx (1867) carries the bulk of the name recognition on behalf of socialism. The banner of socialism was unfurled in the middle of the nineteenth century to contest the burgeoning liberalism that had been spreading since the demise of feudalism. While each individual was capable of managing his or her way through life, it is important to distinguish between form and substance. At a formal analytical level, each person is able to make his or her own way through life. With respect to the substantive forms of living, however, there is a highly variegated set of ways in which people can construct their lives within a liberal regime. People can differ in the types of activities with

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which they construct their paths, and even among those who advance similar constructions, some will be more imaginative or more energetic than others. Everyone is capable formally of living as they choose even though people differ among themselves in the energy and the imagination they bring to bear in their personal conduct. What became known as liberalism was in large measure a political program of removing restrictions on the ability of people to make their own ways in life. In feudal times, landed estates where held together by primogeniture by which only eldest sons could inherit land. Younger sons who wanted to work the land could either move to the New World or join the movement of laborers to the burgeoning factories. Coverture was a limitation on the ability of women to own property. Where an unmarried woman could hold property in her name, a married women could hold property only through her husband. Both coverture and primogeniture disappeared as feudal restrictions on individual liberty gave way to the growth of liberal institutions and practices. Adam Smith was the primary theoretician of the newly emerging system of natural liberty. To be sure, the liberalism that was emerging was principally dominated by the removal of restrictions on individual action, as represented by the injunction that people should be free to do as they choose except when their actions interfere with the similar rights of everyone else in society. In its early days, liberalism was more a negative program of repealing restrictions on individual actions, as illustrated by but by no means limited to coverture and primogeniture. To abolish restrictions forms a limited political program that might be of more value to some people than others. For instance, the children of a merchant might have a better set of ideas about how to conduct themselves in the new environment they were inheriting than the children of parents laboring in the fields. While some proponents of liberalism voiced concerns about articulating positive political programs, for the most part socialism arose as an effort to articulate positive programs for societies going forward after feudalism. Particularly notable in this respect is that the nomenclature of governance and its organization were essentially unchanged as between the old feudal regimes and the new regimes of liberal democracy and constitutional monarchy. In either case, reality entailed a split between those who govern and those who are governed. In feudal times, governance was the province of families: either you were born into a cohort of governors or you weren’t. While there was no birthright that enabled one to hold democratic position, there is clearly immense variability within a society regarding personal possibilities of gaining elected office, and with there being an exceedingly skewed distribution of possibilities within a national population, as illustrated by, for instance, something like candidates for office being drawn from, say, 5% of the population. Within democratic regimes, moreover, an ideological language emerged to cloud the intense skewness in concentration among holders of elected positions. That language elevates the holders of elected office to higher moral position within the national population, as conveyed by such claims as political officials pursuing public values and not their own values. Within the emerging liberal regimes, an ideology of self-governance clashed with the realist recognition of the numerous dimensions along which people differed among themselves and which rendered

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moot any claim that elected politicians belonged to some moral elite. In any case, it seems as though all historical forms of human governance entail processes by which a relatively few number of people govern a relatively large number, and with this observation being reconciled with such varied ideologies as kings ruling by divine right, some people being born to the manor, and democratic politicians being guided by public interest. All of these and many more represent the insertion of ideological assertion into what would otherwise be the scientific activity of seeking to understand more fully the social life that we observe going on around us.

 eoclassical Economics: Economics N as Resource Administration As the classical economists gave way to the neoclassical economists increasingly after 1871, economics morphed from a social science that aimed to apprehend the observed patterns of people living together in close geographical proximity into a science of rational resource administration where human action was aimed at replacing less valued with more valued activities. The absorption of the differential calculus into economics as illustrated by William Stanley Jevons (1871) and Léon Walras (1874) heralded the morphing of economics into a discipline suitable for resource administration and rational action, recognizing that Augustin Cournot (1838) led the way in injecting calculus into economics. Carl Menger (1871), moreover, resisted injecting the calculus into economics on the grounds that doing so would obscure deeper problems to focus on simpler ones. These predecessors aside, the main figure in the turn from classical to neoclassical economics was surely Alfred Marshall whose Principles of Economics, which was anticipated for several years before its 1890 publication, was published in eight editions through 1920 and with a two-volume variorum edition issued in 1961. This variorum edition includes a volume of memoranda concerning such matters as the exams students must pass to graduate with honors with economics as a subfield within the moral science exams at Cambridge, along with Marshall’s writings in support of separating economics from the moral sciences exam at Cambridge. So long as economics was but a piece of the moral sciences exam, Marshall was convinced that economics would be significantly submerged inside moral philosophy and thereby fail to fill its potential as an independent field of study. Marshall’s campaign for Cambridge to grant independent standing to economics within its examination system was granted in 1903. In rendering economics as a science akin to the natural sciences, Marshall sought to concentrate economics on its scientific aspects by deemphasizing places where economics touched upon philosophy and the other social sciences and by stressing the ability of economic concepts and categories to be addressed through statistics. All the same, the transition from classical to neoclassical periods along with the separation of economics from moral philosophy brought about change within

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economics. Emphasized were questions and topics that made economics resemble the natural sciences more fully. Deemphasized were questions and topics that reminded economists of their heritage as part of the moral sciences. In this respect, Marshall often noted the significance of what he called the “measuring rod of money” for economic discourse and activity. Invisible hands could not easily be brought under the measuring rod of money because of their very invisibility. Invisible hands, moreover, recall an iceberg style of theorizing in that matters that are visible on the surface are influenced all the same by phenomena that lie beneath the surface, and with the challenge to invisible hand theorizing being to connect what is seen with what is unseen but real all the same (Aydinonat 2008). As noted earlier, such practices as primogeniture and coverture created cleavages between first-born sons and unmarried women relative to other men and women. Adam Smith’s system of natural liberty might pertain in the limit to a system where such principles as primogeniture and coverture had vanished, whereas different patterns of social organization would exist where such practices remained in place, even if only partially as illustrated by incomplete abolition. In the case of incomplete abolition, moreover, further analytical questions would arise concerning such things as coming to terms with what lies behind the restriction rather than the abolition of such practices. To address these types of questions would, moreover, open into questions regarding the ability of governing cliques inside society to establish and maintain their positions within society, questions in turn that were more compatible with the classical than the neoclassical schemes of analysis. We come here to one of those forks in the analytical road that the distinction between classical and neoclassical economics does more to obscure than to clarify. Alfred Marshall occupies a peculiar position in the transition between the classical and neoclassical periods which Roy Weintraub (2002) does much to clarify. Marshall recognized the significance of margins of choice long before he published Principles of Economics and would surely had been added to the standard neoclassical triumvirate of Jevons, Menger, and Walras had Marshall published his lecture notes rather than waiting until 1890. While Marshall recognized the significance of marginal utility, his analytical concerns centered on evolutionary dynamics and not the statics of systemic equilibrium. Weintraub (2002) explains that the mathematics taught at Cambridge in Marshall’s time was suitable for comparative statics but not for evolutionary dynamics. Wanting to move economics in what he thought was a more scientific direction, Marshall developed the analytical compromise of illustrating some of his themes with mathematics in footnotes and appendices while rendering his text in a manner that conveyed his belief that societies were living organisms that were continually evolving through interactions among participants. By the middle of the nineteenth century, economic discourse began to change as advocates of socialism arose to challenge Smith’s system of natural liberty. The economists who favored the system of natural liberty embraced in the late-­nineteenth century the importation of the calculus into economics to buttress the cause of natural liberty. They did this under the banner of neo-classicism in place of the classicism that had been in vogue between Smith and J.S. Mill. Economic scholarship turned in a different direction with the importation of the calculus. The spread of

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socialism which had been contending increasingly vigorously with liberalism as principles of societal organization, was surely aided by claims that the system of natural liberty benefitted the well-to-do at the expense of the workers as conveyed by Marx’s thesis of the immiseration of workers by the capitalist class. This led the neoclassical economists versed in the calculus to counter the Marxist arguments, which in turn led eventually to the articulation of aggregate production functions as describing the economic processes of a liberal economy. The gist of this line of analysis is that under conditions where production in society proceeded according to a production function that was linearly homogeneous, each input received the value of its marginal product and, moreover, the aggregate of all such payments equaled the aggregate value of what was produced. This resolution of what was described as “the adding up problem” might have satisfied those economists who thought the economic organization of society was in good shape, but it did not quiet the socialist and Marxist critics. Those who supported the liberal order of society employed a snapshot-like model of an economy where each person received the value of his or her marginal product and where the sum of those payments equaled the total of what was produced. While this assertion sounds as though it is based on observation, it is nothing like that and instead is a simple implication of a particular chain of logical reasoning. If all output in a society is produced according to a single production function that is linear and homogeneous and if people are free to choose their employments, each person will receive the value of his or her marginal product and the sum of those payments will equal the amount produced. This is a simple logical exercise. There is, however, no set of observations that will tell whether the outcome of this logical exercise conforms to reality. Indeed, one may reasonably question whether any static scheme of thought that describes a parade is suitable for examining the turbulent crowd of pedestrians leaving a stadium after an event (Wagner 2020).

 wo Distinct Objects for Economic Inquiry: Society T and Administration While people commonly speak of economics or political economy as if the term refers to a single discipline, the term actually covers two distinct scholarly disciplines parading under the same banner. Each discipline pertains to a coherent subject matter, but the subject matters are distinct ontologically speaking. For a discipline focused on administration, the discipline has interest and value to anyone who engages in resource administration, which includes nearly everyone. For instance, the economist Philip Wicksteed (1910) describes how a housewife could call upon economic principles in deciding how to distribute mashed potatoes among her children. The principle in play here is the generic one that the maximal satisfaction obtainable from a given lump of resource is achieved when the yield from each of several possible uses is equal at the relevant margin; hence, each child will value

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equally a marginal unit more of potato. We may doubt whether anyone took up the study of economics to learn how to serve family dinners, and yet the marginal calculus does provide a useful though formal as distinct from substantive framework whenever someone faces a situation where he or she must distribute some input among a variety of uses. Strictly speaking, the marginal calculus requires situations where the relevant variables are continuously divisible whereas administration often calls for choices among discrete options. This situation simply means that administration extends beyond the use of the calculus of maxima and minima, as illustrated, for instance, by discrete programming as a different platform for optimization. In this regard, Paul Samuelson (1947) advanced a coherent treatment of economics as administration within a framework of continuous variation. A decade later, Robert Dorfman, Paul Samuelson, and Robert Solow (1958) did the same thing for discrete variation by assimilating linear programming to optimization. All administrative action deals with actions aimed at achieving objectives which in turn can be readily transformed into the injunction to manage your administrative domain so as to maximize the divergence between the value you are able to achieve with the resources you manage and the expenses you must bear for the use of those resources. With respect to privately owned businesses, administrative science would aim at maximizing the net worth of administered businesses. With respect to the political administration of enterprises, the same principle of maximizing the deviation between value and expense would be in play as a feature of the formalism of optimization; however, there is a divergence between form and substance because political enterprises lack market value and yet changes in market value are a significant part of the continuing process through which owners continually shift resources away from less valuable into more valuable uses. As a formal matter, private and public administration are indistinct, for administration is administration. As a substantive matter, however, there is a load of difference between the two: private administration is guided by the magic number two while public administration is guided by the magic number three (Podemska-Mikluch and Wagner 2013). There is more to organized social life than the generation of some maximum measure of aggregate output. The classical economists starting with Adam Smith did not aspire to be scientists of rational resource administration and sought instead to be scientists of societal organization. Smith and the scholars associated with the Scottish Enlightenment were students of society and not aspiring administrators of resources held within society. Erwin Dekker (2016) explains that the Austrian economists of the late nineteenth and early twentieth centuries were likewise students of society and not resource administration. Economics for these people was a science of society and not an administrative science. To be sure, there is nothing wrong or illogical about aspiring to be an administrative scientist. To the contrary, the point is that economics can be deployed in two distinct analytical directions, with difficulties arising only if the distinct domains of the different disciplines are jumbled together, as they have been for the past century or so when problems that belong within the domain of social science are treated by the techniques of optimization which is suitable only for resource administration (Boettke 2018). By contrast,

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social science entails conflict and cooperation among differently situated administrators, and this setting is not reducible to administrative science. Within this alternative framework, economics is a science of social organization where society contains both the n individuals who comprise the society and the social system itself (Pryor 2008) as a real entity that, moreover, is a complex as distinct from a simple object (Weaver 1948). There are n individuals who possess utility functions and those individuals in turn organize themselves into a wide variety of associations, with some of those associations being private and others political. One prominent scheme of thought reduces those n individuals along with the myriad associations into which they group themselves into one representative agent to denote the entire society. This scheme is simplistic at its core in that society is treated as a single representative with the representative individual being multiplied by n to yield the relevant societal magnitudes. Alternatively, there is the path of complexity as Weaver (1948) sketched which starts, but only starts, with the n individuals who comprise the society and who pursue their own paths within the society, which includes the creation of myriad private associations of variable size and composition. Also present within society will surely reside some political imperative along the lines that Carl Schmitt (1932) articulates as an unavoidable feature of people living together in close proximity to one another. Within this analytical orientation toward complexity as against simplicity, the standard macro-theoretic presumption that the n individuals are simply clones of one another and hence reducible to a single, representative individual, gives way to recognition that significant differences, including likely latent antagonisms as well, exist among the individuals who constitute the society. While it is still useful to think in terms of individual utility functions, those functional representations are not solipsistic, or at least that not all of them are by any means. This simple shift in conceptualization removes the meaningfulness of arriving at society simply by adding over the n individuals. Society is now a complex object which, moreover, cannot be reduced to statistics through the law of large numbers because sets of individuals form associations inside society, and with each association representing some intentionality of plans. The law of large numbers works if what is observed is random and unexplainable; however, human associations arise through the intentional plans of creators. A further move in the direction of complexity arises through realization that any theorizing about society as an analytical object is to engage in a form of iceberg theorizing in recognition that most of an iceberg lies beneath the surface. With this recognition applied to society, much action within society stems from invisible actions that lie beneath the social surface whereas most economic analysis works by positing connections between surface observations. For instance, it is common to posit a relation between years of schooling people have attained by age 25 and their subsequent annual incomes by age 45. How much education people pursue, as well as such matters as what kinds they pursue, might depend on qualities of the home environments in which they grow up, not to mention their after-school activities between ages 5 and 25. These latter considerations concern what Adam Smith labeled as an invisible hand. They also concern what was called the “social

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question” in the aftermath of industrialization when it was wondered whether a negative program of removing restrictions on personal mobility would be sufficient for promoting the advance of former peasants into new walks of life, or whether some positive program was required to facilitate that advance (Wagner 2019).

Entanglement and Systems-Theoretic Political Economy With respect to the essays in this volume, it is notable that Smith thought in terms of comparing systems of societal organization long before the development of systems theories late in the twentieth century as illustrated by Bertalanffy (1968), Boulding (1956), Coleman (1990), Laszlo (1996), and Meadows (2008). Systems theories recognize the distinction between the parts of a system and the entirety of that system. With respect to the language of object-oriented programming, a system composed of n interacting parts will contain n  +  1 entities because one entity is necessary to incorporate the system itself. With respect to theorizing in terms of systems, moreover, Bertalanffy (1968) distinguishes between mechanical and creative systems, and with social systems being creative in that the individual parts can choose their actions within the system. Social systems as creative systems thus have a level of complexity that mechanical systems lack. With the transformation of economics into a science of resource administration that accompanied the coming of neoclassical economics along with the transformation of governments throughout the west from monarchies to constitutionally restricted monarchies or democracies, the treatment of government within economics construed governments as administrators of their governing domains. Hence, the calculus of maxima and minima was applied to political organizations just as it was applied to business organizations, despite the significant institutional and organizational differences between businesses and governments. Governments were thus construed as maximizing concepts of social welfare through pursuing actions that maximized the difference between the social benefits produced by political action and the social costs, even though those concepts bore no clear resemblance to the categories of everyday life. Always, the social dimension in these constructions was an aggregate over the members of the relevant national territory. Within this scheme of analysis, private individuals were construed as pursuing their personal interests whereas people in their capacities as political agents were presumed to promote some notion of public good, possibly out of lack of any clear alternative and possibly out of some hope that the quality of governance will rise to fit the ideological image. It is easy to recognize that economics and political science comprise distinct scholarly disciplines, but we may doubt that they are truly distinct disciplines as against approaching the same topic from different conceptual angles. To illustrate, consider two books published in 1933 and 1936. In 1933, Frank Knight published The Economic Organization. In this book, Knight explained that every society unavoidably had to return answers to a short set of questions: What will be

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produced? How will that product be produced? And how will that product be distributed among the members of society? No society can fail to address such questions. This necessity does not mean that legislation must be involved in rendering answers. The legal tradition of common law (Berman 1983) is an alternative option. Different ways of addressing those questions may lead to differences in levels of wealth among societies, much as Adam Smith suggested in contrasting the system of natural liberty with the mercantile system. In 1936, the political scientist Harold Lasswell, like Knight, a professor at the University of Chicago, published Politics: Who gets what, when, how? In comparing Knight on economics with Lasswell on politics, what the authors are sketching are alternative images of the same process of resource allocation within society. The images point in different directions, but the images point at the same objects all the same, much as X2 and -X2 are parabolas that point in opposite directions despite having the same origin. In no way are Knight or Lasswell engaging in argument concerning desirable domains of markets or polities, though wide variation is possible in the approaches that different societies will take while addressing those questions. Even more, we may reasonably expect a good deal of controversy to accompany the panoply of questions regarding allocation and distribution within society. Especially noteworthy with respect to exploring political economy within a framework of systems theory is Maffeo Pantaleoni’s (1911) untranslated, two-part article titled in translation “Consideration of some properties of a system of political pricing.” Where ruling scholarly convention treats all participants as participating in the same social system, Pantaleoni treated the Italian political economy as harboring two distinct systems of political economy within the same nation, one a system of market pricing and the other a system of political pricing. To be sure, the systems were not truly independent of one another. Such independence would have been impossible, as will become clear momentarily. To treat them as independent, however, is an important first step in exploring some of the dynamics of systemic interaction that otherwise would have been concealed without exploring each system’s independent properties. Pantaleoni recognized that everyone in Italy belonged to both systems by virtue of their being Italians, derived benefits in varying degrees from each system, and likewise supported in varying degrees enterprises in each system. Pantaleoni’s primary analytical interest concerned not one whit the articulation of norms of conduct to guide the political system, which was the object of interest that had come to dominate neoclassical economists. To the contrary, Pantaleoni assumed that managers of enterprises in each system were competent managers of their enterprises, so did not need instruction from him. Pantaleoni sought to explain the boundary relations between the two systems and the enterprises within those systems. Pantaleoni asked his readers to imagine a society which contained two large bazaars. In one bazaar the shops sold their wares at market prices. In the other bazaar the shops sold their wares at political prices. The properties of the system of market pricing had been the prime object of economic analysis throughout the neoclassical period, and with it recognized by 1911 that market prices tend to equal the

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marginal costs of production. A bazaar where the shops charged market prices would thus price their wares at their marginal costs of production. But what could Pantaleoni say about the properties of the political system of pricing and allocation? Pantaleoni recognized that the political system did entail a system of pricing and allocation inside of which collective interactions were transacted even though those systemic properties weren’t generally recognized. People typically ignored the system of political pricing, by choosing to focus instead on articulating abstract principles of good governance and offering accompanying words of wisdom. Pantaleoni was one of a small group of Italian economists beginning with Antonio de Viti de Marco (1888) who sought to move political economy away from the province of normative or welfare economics by directing the study of political economy toward asking explanatory questions. In this respect, the essays collected in de Viti (1930) are especially notable both because de Viti served as a member of the Italian parliament for some 20 years and because those collected essays reveal a pattern of collective action that runs strongly contrary to any exhortation derived from normative or welfare economics. Pantaleoni and his colleagues observed political enterprises providing services within the political bazaar and which were accompanied by the political enterprises hiring inputs and receiving revenues. Pantaleoni saw no advance to be made in economic theory by issuing normative advice to politicians and recognized that politicians knew far better how to be politicians than he and his colleagues could ever know. Hence, Pantaleoni focused his analytical attention on pursuing the principles governing boundary relationships between the market and political bazaars in his model. Especially relevant for Pantaleoni was his recognition that the shops in the political bazaar bore a parasitical relationship to the shops in the market bazaar, recognizing that Pantaleoni used parasitical in a technical or biological sense and not in any normative sense. Pantaleoni’s point started from recognition that a private citizen could erect a shop, stock it with merchandise, and observe whether revenues subsequently exceeded or fell short of cost of production. No governmental entity, however, erects a shop, stocks it with services, and observes whether customers pay more for those services than it costs the shop to supply. Governments don’t work this way, though there is some history in the Middle Ages of Germanic principalities financing their activities through prices they charged for the use of princely lands and services (Backhaus and Wagner 1987). To the contrary, governments finance their activities by imposing taxes on transactions within the market bazaar and transferring the revenues to shops within the political bazaar. Hence, the political price system exists parasitically upon the market price system. Pantaleoni (1911) is especially fraught with analytical implications in light of the growing interest in the systems-theoretic articulation of emergent part-to-­ whole relationships wherein all the parts are embedded inside a system and interact in particular ways with one another, and yet the system itself influences actions among the parts even if the system itself is not truly a source of action. It is easy to understand that the market bazaar will tend to be swamped by the political bazaar, only this swamped character will be disguised by certain cooperative relationships

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between political enterprises and market enterprises, especially between large market enterprises and political enterprises.

In Conclusion For economics to be treated as an administrative science, it is sufficient to treat the individual members of society as solipsistic creatures who maximize utility functions subject to the prices that emerge out of the similar actions among everyone else. This is the approach of additive political economy, which is also the approach of macroeconomics where the social whole is apprehended through aggregation over the economic actions of everyone in society. It is also the standard approach to the economic analysis of public policy where objectives are posited for some political agency and policy options sketched. Understated within this administrative approach is recognition that winners invariably write history. Democratic governance is always directed by winning factions inside a regime where there is continual contention among factions. While a language of public interest is typically employed in describing the policy measures as generally beneficial to everyone in the society, this is a clear stretch of an arithmetical truth of factional democracy and of the shifting of factional composition through time and over elections. In sharp contrast to economics as administrative science, entangled political economy takes seriously, as did the tradition of classical economics, especially when extending that tradition to Frank Knight and to the Austrian students of civilization (Dekker 2016), the presumption that people are social creatures. To treat people as social creatures runs the risk of defusing the dark side of the human animal by limiting social character to such pleasant images as dancing and choral singing. To the contrary, social creatureliness pertains to all facets of human activity that involve some plurality of people. Fighting is a social activity as is counterfeiting currency, in that these and all other similar activities require some plurality of people. That there will be participants in those activities who would rather not be there is beside the point because these are human activities that draw their meaning only from the presence of multiple persons. The extent to which a society will feature these forms of redistributive activities is surely a question for theories of social organization, but it is also a question about which one might be dubious as to the ability of administrative tools and techniques to limit such activity in light of the recognition that the bulk of democratic activity has redistributive character. Without doubt, that redistributive activity is justified by advocates as necessary for promoting the greater public good. But what else could one ever expect a political advocate to say? For instance, the American Affordable Care Act of 2010 is described in political language as a piece of legislation to lower medical expenses for everyone. This language reflects the winners writing history, as do all instances of selecting titles for legislation. Titles aren’t selected to convey historical accuracy but to congratulate and strengthen the winning coalition. In the aftermath of the Affordable Care Act, there are people who experience lower-cost medical care, but there are

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also numerous people who experience medical care that is more expensive and of inferior quality. Furthermore, paying more for lesser quality is but one facet of the coalitional politics that created the alternative history for the winners from that legislation.

References Alexander, J.C. 2006. The Civil Sphere. Oxford: Oxford University Press. Aydinonat, N.E. 2008. The Invisible Hand in Economics. London: Routledge. Backhaus, J.G., and R.E.  Wagner. 1987. The Cameralists: A Public Choice Perspective. Public Choice 53: 3–20. Berman, H. 1983. Law and Revolution: The Formation of the Western Legal Tradition. Cambridge, MA: Harvard University Press. Bertalanffy, L. 1968. General System Theory. New York: George Braziller. Boettke, P. 2018. Economics and Public Administration. Southern Economic Journal 84: 938–959. Boulding, K.E. 1956. General Systems Theory: The Skeleton of Science. Management Science 2: 197–208. Coleman, J.S. 1990. Foundations of Social Theory. Cambridge, MA: Harvard University Press. Cournot, A. 1838 [1897]. Researches into Mathematical Principles of the Theory of Wealth. New York: Macmillan. De Viti de Marco, A. 1888. Il carattere teorico dell’economia financiaria. Rome: Pasqualucci. ———. 1930. Un trentennio di lotte politiche: 1894–1922. Naples: Giannini. Dekker, E. 2016. The Viennese Students of Civilization. Cambridge: Cambridge University Press. Dorfman, R., P.A. Samuelson, and R. Solow. 1958. Linear Programming and Economic Analysis. New York: McGraw-Hill. Elias, N. 1939. The Civilizing Process. New York: Pantheon Books. Epstein, R.A. 1995. Simple Rules for a Complex World. Cambridge: Harvard University Press. Grice-Hutchison, M. 1952. The School of Salamanca. Oxford: Clarendon Press. Hurtado, H., and M.P. Paganelli. 2022. Diamonds Are Forever: Adam Smith and Carl Menger on Value and Relative Status. Entangled Political Economy Research Network, 18 October 2022. Jevons, W.S. 1871. The Theory of Political Economy. London: Macmillan. Knight, R.H. 1933. The Economic Organization. Chicago: University of Chicago Press. Lasswell, H.D. 1936. Politics: Who Gets What, When, How? New York: McGraw-Hill. Laszlo, E. 1996. The Systems View of the World. Cresskill: Hampton Press. Marshall, A. 1890–1920. Principles of Economics, 8 editions. Cambridge: Cambridge University Press. Marx, K. 1867. Capital: Critique of Political Economy. Vol. 1. Chicago: Regnery. Meadows, D.H. 2008. Thinking in Systems. White River: Chelsea Green. Menger, C. 1871. Principles of Economics. New York: New York University Press. Mill, J.S. 1848 [1871, 7th ed.]. Principles of Political Economy. London: J.W. Parker. Pantaleoni, M. 1911. Considerazioni sulle proprieta di un sistema di prezzi politici. Giornale degli Economisti 42: 9–29, 114–133. Podemska-Mikluch, M., and R.E.  Wagner. 2013. Dyads, Triads, and the Theory of Exchange: Between Liberty and Coercion. The Review of Austrian Economics 26: 171–182. Pryor, F.L. 2008. System as a Causal Force. Journal of Economic Behavior and Organization 67: 545–559. Riker, W. 1962. The Theory of Political Coalitions. New Haven: Yale University Press. Samuelson, P.A. 1947. Foundations of Economic Analysis. Cambridge, MA: Harvard University Press. Schmitt, C. 1932 [1996]. The Concept of the Political. Chicago: University of Chicago Press.

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Schumpeter, J.A. 1954. History of Economic Analysis. Oxford: Oxford University Press. Smith, A. 1759 [1976]. The Theory of Moral Sentiments. Indianapolis: Liberty Fund. ———. 1776 [1981]. An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis: Liberty Fund. Stuart, James. 1767. Inquiry into Principles of Political Economy. London: Millan & Cadell. Wagner, R.E. 2019. Economic Theory and “The Social Question”: Some Dialectics Regarding the Work-Dependency Relationship. Journal of Contextual Economics 139: 407–420. ———. 2020. Macroeconomics as Systems Theory. London: Palgrave Macmillan. Walras, L. 1874 [1954]. Elements of Pure Economics. Homewood: Richard D. Irwin. Weaver, W. 1948. Science and Complexity. American Scientist 36: 536–544. Weintraub, E.R. 2002. How Economics Became a Mathematical Science. Durham: Duke University Press. Wicksteed, P.H. 1910. The Commonsense of Political Economy. London: Macmillan.

Duality, Liberty, and Realism in Entangled Political Economy Giampaolo Garzarelli

, Lyndal Keeton

, and Aldo A. Sitoe

Rationalists, wearing square hats, Thinking, in square rooms, Looking at the floor, Looking at the ceiling. They confine themselves. To right-angled triangles, If they tried rhomboids, Cones, waving lines, ellipses – As, for example, the ellipses of the half-moon – Rationalists would wear sombreros. – Stevens (1923, webbed version) Models are undeniably beautiful, and a man may justly be proud to be seen in their company. But they may have their hidden vices. The question is, after all, not only whether they are good to look at, but whether we can live happily with them. – Kaplan (1964), as quoted in Aris (1994: 104) … all models are wrong, but some are useful. – Box and Draper (1987: 424)

The authors would like to thank Rosolino Candela, Lorenzo Infantino, Marianne Johnson, Marta Podemska-Mikluch, Richard E. Wagner, participants at the SEF economics seminar series at the University of the Witwatersrand, Johannesburg, and two anonymous referees. G. Garzarelli (*) Department of Social and Economic Sciences (DiSSE), Sapienza – University of Rome, Rome, Italy e-mail: [email protected] L. Keeton · A. A. Sitoe IPEG, SEF, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_2

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Introduction This work deals with some theoretical considerations related to entangled political economy – the political economy framework envisioned by Richard E. Wagner that considers the conduct of private and public actors (consumers, entrepreneurs, firms, politicians, etc.) that share the same social environment as being naturally dependent on each other. It focuses on the main motivation of entangled political economy, which is shared with Constitutional Political Economy – namely, the protection of classical liberalism (Novak and Podemska-Mikluch 2022: Table 2). The “mental model” (Denzau and North 1994) of classical liberalism can vary according to context (for example, economic, methodological, philosophical, political), time period, and even geography. (See, e.g., Johnson’s 2023 overview of the model in a related discussion.) It is consequently difficult to settle on it univocally. Our point of orientation is to settle on what we consider to be the key moral of what the mental model stands for in practice (among others, Hayek 2013a [1973]; Ostrom et  al. 1992; Buchanan 2000a). Classical liberalism believes that people are more likely to flourish in a polity where there are also public institutions that help to daily discipline, govern, and safeguard personal spheres of autonomy of action. It is not the direct exercise of authority, fickle intervention, and social planning that let people reach peaceful consensus on social choices; rather, it is the rules of the game that permit, for all, free and sincere conversation, learning from mistakes, and open interaction that matter the most for social order. For reasons of shorthand, from now on we will refer to classical liberalism simply as liberalism. Entangled political economy sees the protection of liberalism from two perspectives (Burnham 2020 [1943]: 3–20). The first perspective is sentimental or idealistic, where “human governance could be reduced to ethics, law, and commerce, leaving no room for the political insertion of force into society” (Wagner 2017: 14). The other perspective is the muscular or pragmatic one of political realism where states and their governments exist, and cannot be abstracted from (e.g., Mill 1965

In 2000 or 2001, while a graduate student at the University of Connecticut, Storrs, I (Giampaolo Garzarelli) had a conversation with a young public finance professor about Public Choice and public finance. To my surprise the young professor insisted that Public Choice had been accepted by neoclassical economics, implying with this that Public Choice was good economics being now a subset of neoclassical theory. I suggested that Public Choice could never fully be a subset of neoclassical theory, notwithstanding the fact that Public Choice also employed mathematical and statistical methods, because of the different philosophical starting points of the two research programs (teleological and a-institutional the neoclassical, processual and institutional the Public Choice). He looked at me as if I should not pose myself such ‘nonrigorous’ problems at all. Back then I did not know what I know now, which makes me realize, among other things, that my emphasis should have been more on Constitutional Political Economy than on Public Choice. We also did not have, to the best of my knowledge, entangled political economy – at least as clearly defined as now. Recently, I have come to realize that writing this chapter with Lyndal Keeton and Aldo A. Sitoe represents a subconscious attempt to differently articulate some parts of my original argument that was born from youthful exuberance.

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[1848]: 799–971). In this realpolitik perspective (Buchanan 1999a [1979]), “free societies are not self-sustaining, and can degenerate without the proper use of force” (Wagner 2017: 14). Put differently, the sentimental perspective considers protecting liberalism by maximizing liberty; while the muscular perspective considers protecting liberalism through the minimization of coercion. In what follows, we consider the implications of both these perspectives for entangled political economy through the economics framework of duality. Duality is a useful formal tool of economics that allows the derivation of the structure and solution of one problem (known as the primal) from the structure and solution of another, related problem (known as the dual) (e.g., Blume 2017 [2008]).1 For example, in microeconomics we can solve the primal of utility maximization also as its dual, i.e. as an expenditure minimization problem. To our knowledge, duality has not yet been studied within entangled political economy. We attempt to fill this lacuna through the lens of liberty and coercion duality. We find that in an entangled political economy framework the problem of maximizing liberty differs in practice from the problem of minimizing coercion. Entangled political economy in fact reveals a failure of duality, a problem that does not exist under more familiar economics approaches. But entangled political economy also reveals that not all is lost. The failure regards the primal and not the dual problem. If one considers the muscular problem of how to minimize coercion as opposed to the sentimental problem of maximizing liberty, then the problem’s solution hinges on institutional design as opposed to allocative choice. What this ultimately means is that the only concrete way that we have at present to protect liberalism is to minimize coercion. And this conclusion implies that the relationship between liberty and coercion is itself entangled. We will see how the increased realisticness – roughly the practice of incorporating more elements of reality into a theory (e.g., Mäki 1989), which in our case includes realism in the pragmatic political science sense  – of entangled political economy improves our ability to explain. In essence, the current edge of entangled political economy concerns our ability to explain more than our ability to predict. This edge is typical of more realistic social theories (Leijonhufvud 1997). Substantively, coercion explicitly emerges as an instrument for both sustaining and suppressing liberty.

 In economics, the idea of duality started with Antonelli’s introduction of the indirect utility function in 1886, although the equality between the indirect utility function and the direct utility function was established only four decades later, in 1926, by Konyus and Byushgens. The duality between the indirect utility function and the direct utility function was based on Minkowski’s 1911 theorem in mathematics. Minkowski’s theorem established the duality between a closed convex set and its supporting halfspaces (Diewert 1987). This idea that there is more than one way to describe a convex set – i.e., Minkowski’s theorem – has been applied to various other dual relationships in economics. To take some well-known examples, especially in microeconomic analysis, the profit function and the cost function (Rosas and Lence 2019), the input distance function and the cost function, and the output distance function and the revenue function (Fare and Primont 2006; Pastor and Aparicio 2010) are all dual halfspace descriptions of a firm’s technology choice set. 1

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The Coercion-Liberty Nexus The definitions of coercion are many. They are not mutually exclusive. But involve different degrees of refinement (e.g., Nozick 1969; Anderson 2021). The useful refinement for present purposes considers that coercion occurs when someone is forced by others to do something that they would not otherwise be willing to do of their own volition. The coercion can be private or public (Carden et al. 2022). A paradigmatic example of private coercion is being mugged at gunpoint. When it comes to public coercion, we can think about the establishment of the state in light of its comparative advantage in violence (North 1981; Olson 1993) and all that comes with it post-constitutionally (e.g., Buchanan 1990), such as social choices based on the majority’s will, income and other forms of tax, and the legal requirement to drive on the right- or lefthand side of the road. Let us now turn to the definition of liberty. One classic definition suggests that liberty is simply the absence of coercion (e.g., Knight 1941). However, this definition is too narrow for present purposes. One helpful extension of it distinguishes between “natural liberty” and “civil liberty” (Buchanan and Lomasky 1984). Natural liberty manifests in the absence of public coercion. But this would be a world where another form of coercion would dominate, namely the private one, where individuals are more likely to invade the will, and, more generally, the spheres of authority and autonomy, of others through violence and predation. Here we would not be in the presence of a polity – a civil society with a liberal democratic state. Rather, we would be in the presence of a Hobbesian jungle. Hence the world of natural liberty remains, for the most part, an ideal.2 And this leaves us, by difference, in the world where liberty is genuinely civil liberty. In this other world, the advantage in violence of the state trumps the one of the state of nature.3 But the trumping is partial, not complete. There are no free lunches. Rather, rational and reasonable people always reach compromises. For to be in a world of liberty-as-civil-liberty means to be in a polity where there is the enjoyment of “liberty correlatively with a set of duties on the part of other persons to respect such liberty, duties which are enforceable by the agency of the collectivity” (Buchanan and Lomasky 1984: 18), such as a state. Thus, under liberty as intended here coercion is naturally present (Buchanan 2000b [1975]).

 The clause “for the most part” is important in this sentence. There are exceptions in terms of private institutions of coercion (e.g., Leeson 2007; Stringham 2015). 3  In the state of nature with the presence of private coercion, people can be divided into two groups: the coercers and the coerced. In moving towards civil society with some measure of public coercion, it is more obvious that the coerced would be in favor of public coercion as it offers protection from the coercers. The willingness of the coercers to accept public coercion is less obvious. Pantaleoni (1898) suggests that coercers recognize that their position is fickle, e.g., a coercer who displays physical strength will lose that advantage as he ages. With this recognition, coercers, like the coerced, are willing to accept public coercion as a type of insurance against the loss of their ability to coerce. 2

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Musgrave agrees. “Liberty … is not to be defined as absence of restraint and self-­ centered interest only. Rather, a meaningful concept of liberty calls for limitations imposed by mutual concern for others” (Musgrave 1999: 33). Perhaps more interesting is that Mises also notes the public coercion-civil liberty relation. In nature there are no such things as liberty and freedom. There is only the adamant rigidity of the laws of nature to which man must unconditionally submit if he wants to attain any ends at all. Neither was there liberty in the imaginary paradisaical conditions which, according to the fantastic prattle of many writers, preceded the establishment of societal bonds. Where there is no government, everybody is at the mercy of his stronger neighbor. Liberty can be realized only within an established state ready to prevent a gangster from killing and robbing his weaker fellows. But it is the rule of law alone which hinders the rulers from turning themselves into the worst gangsters (Mises 1981 [1936]: 568).

The essential points to be emphasized from the discussion so far are two. The first is that the connection between civil society and the state embeds a nexus between liberty and coercion. Without some minimal level of public coercion, society returns to the state of nature vulnerable to unconstrained private coercion in which, all things remaining the same, liberty would be a random occurrence. This is a consideration that can be traced back at least to Thomas Aquinas and that scholars of coercion still have at the core of their research program. The second point is less explored, and represents our main concern – namely that the coercion-liberty nexus is likely entangled.

Entangled Political Economy Wagner’s (e.g., 2016a, b, 2019) dissatisfaction with more familiar economics approaches – what he refers to as “additive political economy” – rests on the economy and the polity being separable social spheres of action. The relationship between polity and economy is additive because the two are left unchanged in their original nature after interacting; that is, the two spheres remain crisply distinct notwithstanding their interplay. There are no lasting cross-fertilization, cross-parasitism or conflictual relations (Garzarelli and Galli 2020) that lead to blurry boundaries between political and economic action. All reverts to the original position before an interaction. Entangled political economy instead follows in the footsteps of the classical political economists, especially those in the Smithian (Smith 1981 [1776]; Weingast forthcoming) and Mengerian (Horwitz and Koppl 2014; Novak and Podemska-­ Mikluch 2022) traditions, and of the Italian Scienza delle finanze (e.g., Fossati 2010; Wagner 2018). Both stances in fact see economics concerning exchange rather than allocation, and economy and polity influencing each other. Moreover, the polity-­ economy interactions are not once-off and without memory but can persist and shape future interactions. They are complex, not necessarily foreseeable, and likely to stay entangled. In this way political and economic phenomena generate

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unintended consequences. In some cases, the consequences create gains, such as entrepreneurial profits, in others losses, such as rent-seeking windows (Wagner 2016a, b). This naturally feeds into an important entangled political economy distinction, namely that between dyadic and triadic interactions. While dyadic interactions are always mutually beneficial and, as a result, are entered into always voluntarily, triadic interactions can be voluntaristic (interactions that are triadic by invitation) as well as coercive (interactions that are triadic by assertion). Typically, we find dyadic interactions in the market and triadic interactions in the state. Dyads interact in a market order maintained by the state but they do not interact with the state directly. This characteristic grants stability and closure since dyads are residual claimants of any liabilities (legal or economic) that may result from their actions. Matters are different in triadic (by assertion) interactions. In triadic interactions, the state not only maintains the market order, but it also seeks to change it through coercion. Coercion allows some individuals to secure benefits in triadic interactions more cheaply than they could secure in dyadic interactions. This is evidenced by the parasitical nature of political pricing (e.g., Pantaleoni 1911a, b; Wagner 1997; Podemska-­ Mikluch and Wagner 2013). The bottom line is that with entangled political economy we find both dyadic and triadic interactions, which create a social ecosystem where there can be both indeterminacy and disequilibrium. Entangled political economy moreover draws our attention to the limitations of closed-ended theorizing. Within closed-ended theory, individuals do not really choose, but face single exits; that is, situations where, given the constraints faced, there is only one rational course of action (e.g., Neves 2004). Cost functions, individuals’ preferences, and utility functions are predetermined, in that they are unaffected by the pattern of social interactions. The maximization (or the minimization) problem, the solution, and the means to reach the solution are all known in advance. Hence “choices” are mechanical and predictable (e.g., Buchanan 1999b [1964]; Boettke 2011). Given predetermined preferences and constraints, Ockham’s razor dictates that we reduce society to an anonymous ideal type, namely the representative individual. Once this reduction is done, the explanation of the process that links the pursuance of individual objectives to social objectives becomes irrelevant since they are indistinguishable (Wagner 2010). As a closed-ended theory has but only one outcome, the theory suggests far greater potential for accurate prediction than what exists. In closed-ended theory, any explanation of how observations in different social orders (quintessentially: market and state) emerge out of the pursuit of individual objectives is circumvented by reducing complexity. Closed-ended theorizing allows for the scalability of interactions. A polity is simply individual interactions scaled up. There is no difference between micro (individual level) and macro (society level) interactions. The quality of interactions remains essentially the same irrespective of size. Figure 1 illustrates complete social interactions among individuals aij with i, j = 1, 2, 3. Interactions on the righthand side are scaled-up versions of interactions on the lefthand side; mutatis mutandis, interactions on the righthand side are reduceable to the interactions on the far lefthand side. Scalability forecloses any genuine consideration of coercion since we

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x (a)

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x

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x

x

x

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x

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Fig. 1  Scalable interactions Fig. 2 Non-scalable partial interactions

scale up voluntary interactions as we move from (a) to (c). The micro and the macro, therefore, are equivalent dyadic interactions. For modeling purposes, only the arguments (e.g., cost functions, preferences, and utility functions) have to be suitably scaled (Wagner 2016b). In contrast, entangled political economy draws our attention to open-ended theory where cost functions, preferences, and utility functions are not predetermined, but can depend on social interaction. In open-ended theory, the polity is not reduced to a representative individual, because the different people may choose different outcomes even when faced with the same constraints. We cannot infer cost functions, preferences, and utility functions from choices because choices provide ambiguous information. To attempt to reduce the ambiguity, we need to do our best to also consider and explain the context and process that leads to choice (Kirzner 1976; Wagner 2010). What is lost in terms of predictability under closed-ended theory, is gained in terms of explanation (e.g., Koppl and Whitman 2004; Garzarelli and Infantino 2019). Within an open-ended theory, individual interactions are not scalable to get social outcomes as is possible in closed-ended theory. As we have lost our ability to infer cost functions, preferences, and utility functions from choices, we no longer have complete interactions but partial ones. Figure 2 shows an open-ended theorizing in which we have partial interactions among individuals aij with i, j = 1, 2, 3. Partial interactions are more realistic. For there is incomplete knowledge (Hayek 1945) in the mind of any particular individual about all others, and, more generally, the world. However, the disadvantage is that it is not possible to scale the interactions down (or up) and still maintain accuracy as is the case in Fig. 1. Moreover,

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A

A=B

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Fig. 3  Predictability and explanation

when theory is open-ended the number of interactions is also significant: the number of interactions adds complexity by reducing the accuracy of the model. The takeaways can be summarized in Venn diagram form as in Fig. 3. Circle A represents information at the individual level and circle B represents information at the societal level. The overlap between A and B – the area in grey – illustrates the extent to which society can be represented by an individual. Thus, greater overlap between A and B also means greater ease with which individual interactions are scalable to obtain societal results; further, the greater is our ability to predict as less additional information is needed to infer societal observations from individual observations. Starting from (a) we can see that there is full overlap between society and the individual; as a consequence, a representative individual’s actions would perfectly predict those of society. As we move from (a) to (b), and then to (c), the predictability decreases as there is less and less overlap between the individual and society. Finally, in (d) we see that there is no overlap and it is not possible to use a representative individual to make predictions for society. Instead, as the overlap between the individual and society decreases, we require greater explanation to understand actions and interactions. Consequently, as we move from (a) to (d), explanation increases in importance. If the scientific objective is predictability as, e.g., in Friedman (1953), then a theory moving towards (a), such as additive political economy, should be the choice. Instead, if the scientific objective is explanation as Wagner (e.g., 2010) argues, then a theory moving towards (d), such as entangled political economy, should be the choice. But (a) and (d) are two ideal-typical extremes. The point is that both

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predictability and explanation are important properties of a theory, hence a move towards (c) is desirable. But at times we cannot have both predictability and explanation – at least in the mix (the shaded area) that one would prefer. Let us make the same point less theoretically and more methodologically. Maximizing liberty and minimizing coercion are the two sides of the same problem only when economic theory is defined exclusively in terms of the logic of choice, which yields additive political economy – Fig. 3a. But the logic of choice is necessary, though not sufficient, for explanation. We also need, as we will see, the logic of choice filtered through institutions. It is the latter approach that generates non-­ scalable outcomes. Hence, in Fig. 3b, where A is just the logic of choice (or pure theory), B refers to factual and historical outcomes, and the overlap between A and B is the logic of choice filtered through institutions (or applied theory). If this is about correct, then we should indeed desire a tendency from 3b to 3c. A tendency that is consistent with entangled political economy. (A move to 3d would imply historicism  – a complete severing of the logic of choice from facts and history, rejecting the universality of purposive human action.)

Duality, Liberty, and Realism Duality of Liberty Versus Coercion: The Additive Framework Assume two publicly provided goods, g1 and g2, generating some level of liberty, U(g1, g2). We could proxy for liberty in different ways, freedom to trade, standard of living, etc. In Fig. 4, the curve U(g1, g2) illustrates all combinations of goods that provide the individual with the same level of liberty. To obtain more of one good, the individual

∗

(

∗

Fig. 4  Liberty and coercion as a dual problem in R+2

,

)

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must sacrifice some of the other good. Therefore U(g1, g2) – which can be thought of as a liberty curve – is downwards sloping. The slope of the liberty curve tells us the rate of the trade-off of one good for the other, holding the level of liberty constant. Since we assume that the individual prefers more to less liberty, the individual obtains a higher (lower) level of liberty from a combination of goods above (below) those on U(g1, g2). The choice between g1 and g2 becomes meaningful only when the individual faces a constraint. The individual’s income – or the total amount of money to be spent on goods g1 and g2 – Y, and the corresponding tax prices for the goods, t1 and Y Y t2, define the individual’s constraint, , which we refer to as the coercion cont1 t2 straint. There are two main reasons for this reference. First, taxes are not voluntary disbursements. Rather, they are a forced revenue extraction from the natural power asymmetry between individual and state. Second, ceteris paribus, the individual can afford fewer goods as the constraint shifts inwards when the tax increases.4 Y If the individual completely forgoes g2, she gets of good g1. Instead, if the t1 Y individual completely forgoes good g1, she gets of good g2. Between these two t2 extremes, we have the quantities of g1 and g2 that, in combination or bundle, exhaust the individual’s income Y. The coercion constraint, therefore, tells us the maximum quantity of one good that the individual can afford given the other good. Y Y The coercion constraint in Fig. 4 is also downwards sloping. The slope of t1 t2 the constraint tells us the rate of the trade-off of one good for the other, holding income constant. This trade-off is the reason why the individual must choose. We can now consider how the individual chooses between the quantities of g1 and g2 to maximize liberty. Combinations of g1 and g2 above the coercion constraint are unaffordable, hence not feasible. Combinations of g1 and g2 below the constraint are affordable. However, they do not meet the principle of non-satiation (i.e., that the individual prefers more to less liberty). The individual is as a result left with combinations of g1 and g2 on the coercion constraint. Combination  g1* ,g 2*  gives the highest level of liberty, U  g1* ,g 2*  , that the individual can attain given coercion. Under an additive framework, the problem of maximizing liberty has a dual – the problem of minimizing coercion. The primal problem of maximization requires that we find the highest attainable liberty given the level of coercion. In Fig. 4, the highest attainable level of liberty is where the liberty curve is tangent to the coercion constraint, i.e. U(g1, g2). Instead, the minimization problem requires that we find the lowest attainable coercion given the highest attainable liberty. The minimum attainable coercion is also where the coercion constraint is tangent to the liberty curve. In

 Here we concentrate on the second half of the Laffer curve where an increase in the tax price (rate) decreases total taxes. This is where the coercion constraint becomes meaningful. The individual pays more in taxes than she expects to get in terms of publicly provided goods. 4

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Fig. 5  Duality of liberty and coercion from another vantage point

both problems, the tangential point, the solution or equilibrium, is  g1* ,g 2*  . See the Appendix for a formal treatment. A corollary of the liberty and coercion duality is shown in Fig.  5. As per the mathematical relationship, when we have both liberty and coercion as a function of taxes, we can see a symmetry in that as coercion increases, liberty falls; and vice versa. The duality of liberty and coercion therefore also implies a perfect negative correlation between the two variables. It furthermore suggests that both variables can be independently calculated – for example, in this case, as a measure of taxes. While these implications are mathematically correct, we must also inquire into whether these implications are sensible in relation to reality, and align with our earlier reflections about coercion and liberty.

The Entangled Political Economy of Liberty and Coercion The outcome from the additive approach to duality is that whether we choose to maximize liberty or to minimize coercion, we achieve the same result. Maybe more important is the fact that we conveniently have both solution options at our disposal. Within its assumptions, duality from the additive approach is both logically and mathematically sensible. Moreover, duality is an elegant, compact and useful problem-­solving tool. We therefore plead nolo contendere for duality under additive political economy. But what happens to duality if we consider the more realistic theoretical turn implied by entangled political economy? Consider the primal problem first, namely the question of maximizing liberty. Hayek (1967: 348–349) explicitly grappled with this problem contending that “a happy state of perfect [liberty] might conceivably be attained in a society whose members strictly observed a moral code prohibiting coercion.” Yet Hayek perceives the intractability because, he continues, “[u]ntil we know how to produce such a state all we can hope for is to create conditions in which people are prevented from coercing each other. But to prevent people from coercing each other is to coerce them. This means that coercion can only be reduced or made less harmful but not

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entirely eliminated. How far we can reduce it depends in part on circumstances which are not in the control of that organ of deliberate action which we call government.” Three related points from this Hayekian passage need highlighting. The first is that a condition of perfect liberty remains utopian. As we have seen, we do not yet know how to permit perfect liberty for all without the employment of some degree of coercion, which is an inconsistency as the attainment of liberty should be possible independently of coercion. The second point is the reverse side of the first. In any society there is an autonomous component of coercion. The amount of coercion is always positive, never zero. In the polities – recall: civil societies with a liberal democratic state – that we know, both private and public coercion are present in the autonomous component. At the very least, there will always be some muggings. The relevant issue is that in these cases it is not just that both private and public coercion are present, but that in their entanglement public coercion outperforms private coercion. This is not tantamount to saying that a society cannot exist without a state. But it can be read as saying that certain types of societies coevolve with the state (e.g., Elias 2012 [1939]); namely, that in a polity the state itself, including its government, is an aspect of society. The third point is less explicit. It establishes that not all the public amount of coercion comes from the direct management of affairs by government. By difference, this means that in part coercion comes from institutions – those rules of the game, especially, for our concerns, public ones, that substitute discretionary intervention (e.g., legislation, tax code). This is not to say that institutions are the efficient causes of behavior as in, say, Emile Durkheim, or that, e.g., culture, ideas, and mores are extra-economic. Rather, the point is simply that institutions can influence the choice of rational and reasonable people by making available information that would not be otherwise available (Rowe 1989). The rules of the game in fact orient action by revealing options and constraints. We can as a result point to the two sides of an institution that are simultaneously at work. On the one side, an institution rewards some generally-accepted rule-­ following behavior. When all drive on the same side of the road, there are benefits for the individual (less likely to be in an accident) and for society (order through coordination). On the other side, an institution punishes behavior that contradicts generally followed rules. If someone drives on the wrong side of the road, then there are costs for the individual (more likely to be in an accident, to get a traffic violation ticket, etc.) and for society (others being involved in the accident, insurance premia rising, increase in law suits, disorder from lack of coordination, etc.). The basic lesson from the third point is that in a polity individuals do not confront choice under a tabula rasa. Rather, choices are institutionally embedded (Foss and Garzarelli 2007). At this juncture, the relevant question is the following. How are different levels of liberty permitted? Consider an illustration where liberal democracy (a polity) and totalitarianism are ideal-typically compared. It is surely not the level of liberty that is under the control of these two kinds of government. Rather, it is the level of coercion. Totalitarianism always tries to assert explicit control. To do so, it uses

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maximum – which can also be violent – coercion (e.g., abduction, arbitrary confiscation of property, control of the media, disappearance, torture, unequal application of the law). It is not possible for a totalitarian government to attempt to take liberty away without exercising an extreme and direct level of coercion. The exercise of coercion can be complemented and augmented by designing institutions that are explicitly directed towards the direct fulfillment of the totalitarian objectives. In brief, under totalitarianism liberty and coercion are entangled to the extent that the latter constantly tries to fully suppress the former by any means necessary. Conversely, a liberal democracy tries to ensure that ordinary people have the liberty to go about their life as they choose to so long as the going about does not interfere with the life of others. To do so, coercion is not absent. But it mainly manifests indirectly, non-violently and minimally – through rules rather than discretion (e.g., court sentence, regulation, taxes, the exclusion characteristic of property rights). It is not possible for a democratic government to ensure liberty without exercising coercion, however minimal – this entanglement is exercised, in the ordinary course of events, mostly through rules rather than discretion. We therefore see that coercion is the tool in a government’s arsenal that can determine the extent of liberty and not vice versa. In the entanglement, muscles dominate sentiment. But whereas in a polity coercion is employed to permit liberty, in totalitarianism coercion is employed to not permit liberty. So, in a polity, institutions intended as rules of the game that instruct, rather than command, action and behavior are always present. In this sense, we can assert that they are absolute. However, they are not absolute in their nature. If needed, rules can be reformed through the constructive exchange of views. Moreover, they can vary across polities. Think about the presence of varieties of democracy throughout the world (https://www.v-­dem.net/). Rules can also more generally vary within a society over time. For instance, after the fall of the Berlin wall many East European countries began their polity path through the reform of their fundamental public institutions. Thus, the options and constraints from rules are only relatively absolute; their nature can, to appropriate a famous phrase by Hayek (1945) from a different but related context, vary according to time as well as within and across places. Rules are therefore “relatively absolute absolutes” (Knight 1982 [1947]; Simons 1948; Buchanan 1999c [1989]). The substantive implication is that liberty is a spectrum: the institutions of different polities can permit different levels of liberty (Compare also the recent Bergh 2020.) This more realistic perspective from the three Hayekian points that entails the existence “of the state” and its attendant public institutions, such as “the rule of law” (Kelly 2013 [1982]: xv), under liberalism leads to the following pragmatic inference: the problem of maximizing liberty is in actual fact significantly less practicable than direct modeling would suggest. The mathematics remain elegant, logical and sensible. But the socioeconomic aspects of the problem obviously would not remain so because their greater realisticness introduces added complexities, such as the non-separability of liberty from coercion, but also the greater slipperiness or intangibility of liberty as such.

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The recognition that solving a social problem is not always equivalent to solving a mathematical problem (and vice versa) (Nelson 2011) means that we have lost the primal side of duality. This failure of the primal is sufficient to also claim the failure of duality as a whole for liberty and coercion. And yet it does not mean that the dual problem of coercion minimization fails too. If one reflects on the dual, in fact, matters are more promising. Minimizing coercion is a more tractable problem. Unlike liberty, coercion is a control variable that can be more directly influenced by policy conjectures that are either qualitative (e.g., civil code, political regime) or quantitative (e.g., an equalization grant, majority level for collective decision making). In other words, the dual rests on institutions. Duality hence predicts maximizing liberty and minimizing coercion to be the same mathematical problem. But this prediction does not extend to practical or, if you prefer, more realistic social science applications. For what we know to have currently at our disposal are institutions that minimize coercion, which we identify theoretically with the dual of duality. In part, these institutions emerge and evolve without any conscious planning; in part they are designed and change through our direct volition and interactions. Although Hayek would utter more than just a word of caution about institutional design, Constitutional Political Economy and entangled political economy are, relatively speaking, more pragmatic, albeit still prudent. Some institutional design is considered to be feasible, and it is also actually what goes on all the time in the entangled real world. In contemplating the possibility of maximizing liberty in the early stages of his career, Buchanan, for example, went so far as to suggest that liberty existed only in the absence of coercion. However, as his career progressed, he came to realize the impracticality and possibly even the naïveté of the very idea. In fact, Buchanan’s view eventually morphed into the more realistic understanding that a minimum amount of public coercion in the form of a constitution – that rule of the game to which other rules ought to, by definition, conform to – is necessary to maximize liberty. An understanding that later became the foundation of Constitutional Political Economy (Fleury and Marciano 2018). This does not mean that institutional design is perfect. Indeed, quite the opposite is the case: given our limited knowledge, all real-world institutions can be considered imperfect.5 But differently from Constitutional Political Economy, entangled political economy embraces complexity, which, we saw, renders it open-ended as well. This entails that there is – for both entrepreneurs and politicians, whatever the motivation of the latter may be (e.g., Brennan 2008) – room for evolutionary trial-­ and-­error learning that can, in some circumstances, make matters a bit less imperfect (Garzarelli and Keeton 2018).

 This does not mean that they are inefficient. As long as we do not learn about feasible alternatives that are less imperfect and that can replace the institutions that we live under at a net benefit, the institutions that we observe can be considered efficient – of course, this is in relative, not absolute terms. Leeson (2020) makes essentially the same claim starting from a different, but still related, institutional perspective. 5

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A more general observation follows. For the protection of liberalism Public Choice too does not rule out the feasibility of some institutional design. But, differently from Public Choice, entangled political economy suggests that institutional design should not be performed just with the reduction of waste in mind; that is, with emphasizing Public Choice’s minimization of rent seeking. It should also be performed – perhaps above all – with emphasis on the conditions that permit the release of the productive energies of ordinary people. It is in fact these productive energies that, through an entrepreneurial spirit that strives for, and drives, innovation, create value in an economy. Markets thrive on this spirit. This is an appropriate moment to point out that it is also improbable to completely suppress liberty. The elimination of all spontaneity within a situation of subordination is in reality considerably less common than the freely offered popular expressions suggest with such notions as ‘coercion,’ ‘having no-choice,’ ‘absolute necessity.’ Even in the most oppressive and cruel relations of subjugation there always yet remains a substantial measure of personal freedom. … Precisely viewed, the relationship of dominance and subordination annihilates the freedom of the subjugated only in the case of direct physical coercion; otherwise it tends simply to demand a price we are not typically inclined to pay for the realization of freedom. (Simmel 2009 [1908]: 130)

The upshot is that liberty and coercion are themselves entangled, not crisply divisible as Figs.  4 and 5 suggest. From a modeling perspective, this leads to a dependency rather than to a duality. The increased realisticness of entangled political economy suggests that liberty ought not to be regarded as separable from coercion. Rather, liberty should be seen as the complementary opposite of coercion. That is to say that, in a polity, liberty is better interpreted as a function of the variable that we have comparatively more control over – viz., coercion. See the stylized representation in Fig.  6. Notice how in a polity the liberty-­ coercion complementarity relation defines liberty in terms of the extent of coercion. When there is no coercion, there is no liberty. In contrast to the prediction from duality where one can conceivably have maximum liberty without any coercion, it is coercion that permits liberty. Accordingly, coercion is always positive in its amount. This autonomous component of coercion entails that the origin is outside the feasible set.

Fig. 6  Liberty and coercion in a polity

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The maximum level of liberty  – L∗  – is obtained when coercion reaches C , which is that natural, or, as Wagner would say, that “proper” level of coercion that renders liberty sustainable. Before C , the amount of coercion is insufficient to sustain liberty. As coercion increases beyond C , liberty can be quickly eroded. However, à la Simmel, it is not necessarily completely lost. Hence, the x-asymptotic portion of the relation. Clearly, C is not absolute. It is polity-relative. Its amount can vary from polity to polity. This assertion that a polity protects liberalism by permitting liberty through its own sui generis C does not entail that the protection is flawless or perpetual. It simply means that it is the extant protection. As a matter of fact, C would only exceptionally be the outcome of a well-defined maximization problem. C is more often the result of immanent conjectures that accumulate over time. We can imagine that at time zero a polity would have its constitution (or equivalent document) as the primitive conjecture that results from compromises among individuals within and between economic and political spheres from which all other policy conjectures would follow. The post-constitutional policy conjectures (also from give and take within and between economic and political spheres) that prove successful would then over time coalesce into the public institutions that add to the formation of the autonomous component of coercion; while the unsuccessful conjectures will instead dissolve away, subtracting from the autonomous component. Both processes evolve blindly and are likely to be at play simultaneously. This conception also implies that C can – and usually will – change through time. In the ordinary course of events, changes in C will be gradual (e.g., a reform in electoral rules). But when non-ordinary events crop up, C can change quickly, non-gradually and by direct intervention. Think about how during the COVID-19 pandemic most polities increased C through lockdown and other fiat policy measures (e.g., mandatory mask wearing) to attempt to contain contagions; and how this change was tied to the duration of the exceptional circumstance.6 However, a polity can also manifest episodes of degenerate and long-lasting coercion, illustrating an instance of the liberty-coercion complementarity relation shifting rightwards, downwards, or, even, flattening to a lower level of L∗. What comes to mind in recent times is Hungary leveraging the COVID-19 pandemic to take a more autocratic turn. Initially, this turn would manifest as a rightward movement along the relation. But were it to become permanent, the institutional changes also will have permanent effects, causing a detrimental shift – i.e., right, down, or flattening. (Whether today Hungary is still a polity because of the increased coercion remains an open question.) Conversely, other long-lasting institutional changes can bring about positive changes in the liberty-coercion complementarity relation by either shifting the curve leftwards, upwards, or even steepening it to a higher  Lockdowns and similar ephemeral suspensions of democracy (e.g., curfews) through more direct coercive policies because of an emergency are something that Hayek (2013a [1973]: 458–459) and Rawls (1999: 55) can, mutatis mutandis, be found to agree on. The point is also found in one of the classic inspirations for both, namely Locke (1999 [1690]: 375). See also Cowen (2021) and Garzarelli et al. (2022). 6

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level of L∗. An illustration of a positive shift close to us in time is the Arab Spring (2010-2012), which pressured façade polities to become polities in practice through the reduction of coercion. Ultimately, outcomes varied but some leaders responded with credible reforms or resignations. There can also be degenerate violent coercion that punctuates a polity’s ordinary course of events. Think of police brutality in the United States. Additionally, one could posit the reduction of coercion in the form of one-time subsidies (amounting to negative taxes), such as the recovery plan for Europe – namely, NextGenerationEU – following the COVID-19 pandemic. More generally, if history is anything to go by (e.g., North, Wallis and Weingast 2009), the conception of C as in most cases being the entangled result of a nonteleological evolutionary process is arguably not unfounded. This conception suggests that the socioeconomic development of societies and of their political governance is complex and interconnected, influenced by a multitude of factors that interact in unpredictable ways. These factors encompass cultural shifts, economic growth, technological advancements, and many more, and they can lead to both positive and negative changes in the liberty-coercion complementarity relation. Therefore, understanding the historical context and acknowledging the role of unforeseen events and adaptation is crucial when analyzing polities and their capacity to maintain a delicate balance between liberty and coercion. This also speaks to the entangled nature of political outcomes as such, providing further insight into this intricate web of interactions.

Discussion Within the additive political economy framework, the problem of maximizing liberty and the problem of minimizing coercion are dual to each other. Hence, the problem one solves is a question of convenience because both are practicable. Issues are different in the more realistic theoretical framework of entangled political economy. Within entangled political economy, the problem of maximizing liberty is less practicable than direct modeling would suggest because in a polity liberty is maintained through coercion. This makes liberty and coercion entangled, not additive. Liberty does not limit coercion. Institutions do, notwithstanding their imperfect nature. Thus, while duality predicts maximizing liberty and minimizing coercion to be the same problem, this prediction does not extend to the protection of liberalism under entangled political economy. The exposed failure of duality is another indication of how entangled political economy is not additive. In fact, with its emphasis on the non-separability of liberty and coercion, entangled political economy points out that liberalism does not emerge from the positive liberty that income permits to ordinary people, as predicted by duality in additive political economy. As entangled political economy explains, liberalism emerges from the negative liberty that the rules of the game permit to ordinary people to equally flourish – without them physically coercing each other (e.g., Berlin 2002 [1969]: 169; McCloskey 2016; Infantino 2020). Hence, there is the primacy of

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negative liberty over the positive. At the same time, entanglement suggests that for the protection of liberalism we ought to consider positive and negative liberty also as themselves being entangled. For such entanglement defines the open-ended nature of choice. As Hayek (2013b [1960]: 69–70) writes, it is often objected that our concept of liberty is merely negative. … This is true in the sense that peace is also a negative concept or that security or quiet or the absence of any particular impediment or evil is negative. It is to this class of concepts that liberty belongs: it describes the absence of a particular obstacle  – coercion by other men. It becomes positive only through what we make of it. It does not assure us of any particular opportunities, but leaves it to us to decide what use we shall make of the circumstances in which we find ourselves.

Perhaps a portmanteau for the entanglement of positive and negative liberty in a polity can be simply the earlier notion of civil liberty. The open-endedness of entangled political economy can still retain rigor in ways we still need to discover. At this point evolutionary concepts seem to be most helpful, but only time will tell. In terms of a normative result, a fundamental lesson is that the protection of liberalism is a work in progress, because changes in coercion always occur in the entangled real world. Our job is therefore to stay vigilant. As a young theory, the success of entangled political economy revolves around growing the community of scholars that actively contribute to it as a positive research program (Lakatos 1989 [1978]). How this can be achieved is a sociological question. Previous successful examples ought to be emulated. We need to use all the tools at our disposal for building and growing the invisible college: research groups at universities, seminars, professional organizations, and publication outlets (Hodgson 2022; Snyder 2004). The success of Public Choice in the 1960s and 1970s provides an example that can be replicated. Besides the oft-cited leaderships of James Buchanan and Gordon Tullock, the expansion of Public Choice owes also to research groups, the founding of the journal Public Choice (formerly Papers on Nonmarket Decision Making), and visiting scholars and graduate students programs (Medema 2004; Wagner 2004). The Entangled Political Economy Research Network represents an important initiative in this sense (https://www.entangledpoliticaleconomy.org/). And, with the growth of the field in mind, scholars seeking to contribute to entangled political economy may also consider the recently relaunched Journal of Public Finance and Public Choice as a possible outlet. We are grateful to Richard E. Wagner, the founder of entangled political economy, who has set us on a new path of discovery.

Appendix Consider a society of N individuals indexed by i = {1, …, N}. There is a bundle of publicly provided goods G i   g1i , ,g Ni   RN providing some standard of living U i  G i   RN . Let Ui(Gi) measure the level of liberty. Each individual i has an

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income Y i  RN and faces a vector of tax prices T i  t1i , ,t Ni   RN for Gi. Each individual i aims to max U i  G i  s.t.  i G i  Y i ,



G

(1)



tki  j Yi  i i tj tj is the coercion line. The tax t ij is a measure of coercion: an increase in t ij increases coercion. An increase in t ij decreases g ij , Gi, and Ui(Gi). That is to say that an increase in coercion decreases liberty. The solution to (1) is:

where τi is the transpose of Ti, τiGi = Yi is the coercion constraint, and g ij 

G i  G i  i ,Y i  .



(2)



In (2) we have that, for individual i, the optimal quantity of a bundle of publicly provided goods Gi depends on a vector of tax prices τi and income Yi. Using (1) and (2), we get i’s maximum obtainable liberty, Ui∗, as follows:

U i*  U i* G i  i ,Y i    V i  i ,Y i  .

(3)



Dual to (1) is the following minimization problem:

min  i G i  Y i G

s.t. U i  G i   U i* .

(4)



The solution to (4) is:

G i #  G i #  i ,U i*  .

(5)



In (5) we have individual i’s optimal quantity of publicly provided goods Gi# stated in terms of the vector of tax prices τi and the maximum attainable liberty Ui∗. Using (4) and (5) we get the minimum coercion constraint that i needs to obtain Ui∗:

 i G i #   i G i #  i ,U i    Y i  i ,U i   .

(6)



Using (3) and (5), we have duality as follows:

G i #  i ,U i*   G i #  i ,V i  i ,Y i    G i  i ,Y i   G i* .



(7)

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Locke, John. 1999. Two Treatises of Government (Ed. P.  Laslett). Cambridge: Cambridge University Press. (Originally published in 1690). Mäki, Uskali. 1989. On the Problem of Realism in Economics. Ricerche Economiche 43 (1–2): 176–198. McCloskey, Deirdre Nansen. 2016. Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World. Chicago: University of Chicago Press. Medema, Steven G. 2004, January. Public Choice and Deviance: A Comment. American Journal of Economics and Sociology 63 (1): 51–54. Mill, John S. 1965. Principles of Political Economy with Some of Their Applications to Social Philosophy, Books III–V and Appendices (Introduction by V.  W. Bladen; Textual Editor J.  M. Robson), in Collected Works of John Stuart Mill, Volume III. Toronto: University of Toronto Press. (Originally published 1848). Mises, Ludwig von. 1981. Socialism: An Economic and Sociological Analysis. Indianapolis: Liberty Fund. (Originally published 1936). Musgrave, Richard A. 1999. The Nature of the Fiscal State: The Roots of My Thinking. In Public Finance and Public Choice: Two Contrasting Visions of the State, ed. James M. Buchanan and Richard A. Musgrave, 29–49. Cambridge, MA: MIT Press. Nelson, Richard R. 2011, November. The Moon and the Ghetto Revisited. Science and Public Policy 38 (9): 681–690. Neves, Vitor. 2004, November. Situational Analysis Beyond ‘Single-Exit’ Modeling. Cambridge Journal of Economics 28 (6): 921–936. North, Douglass C. 1981. Structure and Change in Economic History. New York: W.W. Norton. North, Douglass C., John J. Wallis, and Barry R. Weingast. 2009. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. New York: Cambridge University Press. Novak, Mikayla, and Marta Podemska-Mikluch. 2022. Entangled Political Economy and Public Choice – Complements or Substitutes? Unpublished paper. Nozick, Robert. 1969. Coercion. In Philosophy, Science, and Method: Essays in Honor of Ernest Nagel, ed. Sidney Morgenbesser, Patrick Suppes, and Morton White, 440–472. New York: St. Martin’s Press. Olson, Mancur. 1993, September. Dictatorship, Democracy, and Development. American Political Science Review 87 (3): 567–576. Ostrom, Elinor, James Walker, and Roy Gardner. 1992, June. Covenants With and Without a Sword: Self-Governance Is Possible. American Political Science Review 86 (2): 404–417. Pantaleoni, Maffeo. 1898, June. An Attempt to Analyze the Concepts of ‘Strong and Weak’ in Their Economic Connection. Economic Journal 8 (30): 183–205. ———. 1911a, January. Considerazioni sulle proprietà di un sistema di prezzi politici (Comunicazione fatta al Congresso dell’Associazione per il progresso delle scienze in Napoli): PARTE I. Analisi dei prezzi politici. Giornale degli economisti e Rivista di statistica (Serie terza) 42 (1): 9–29. ———. 1911b, February. Considerazioni sulle proprietà di un sistema di prezzi politici (Comunicazione fatta al Congresso dell’Associazione per il progresso delle scienze in Napoli): PARTE II. Della impossibilità di un sistema generale di prezzi politici e del carattere parassitario dei mercati aventi prezzi politici. (Cont.). Giornale degli economisti e Rivista di statistica (Serie terza) 42 (2): 114–133. Pastor, Jesus T., and Juan Aparicio 2010, July–December. Distance Functions and Efficiency Measurement. Indian Economic Review 45 (2): 193–231. Podemska-Mikluch, Marta, and Richard E. Wagner. 2013, June. Dyads, Triads, and the Theory of Exchange: Between Liberty and Coercion. Review of Austrian Economics 26 (2): 171–182. Rawls, John. 1999. A Theory of Justice, Revised Edition. Cambridge, MA: The Belknap Press of Harvard University Press. Rosas, Francisco, and Sergio H. Lence. 2019, April. How Reliable Is Duality Theory in Empirical Work? American Journal of Agricultural Economics 101 (3): 825–848.

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Rowe, Nicholas. 1989. Rules and Institutions. New York: Philip Allan. Simmel, Georg. 2009. Sociology: Inquiries into the Construction of Social Forms. (Trans. and Ed. Anthony J.  Blasi, Anton K.  Jacobs, and Mathew Kanjirathinkal; Introduction by Horst J. Helle). Leiden: Koninklijke Brill NV. (Originally published in 1908). Simons, Henry. 1948. Economic Policy for a Free Society. Chicago: University of Chicago Press. Smith, A. 1776. An Enquiry into the Nature and Causes of the Wealth of Nations. Indianapolis: Liberty fund. (Originally published in 1776). Snyder, Suzan K. 2004, January. Scientific Progress and Lessons for Institutional Design: Comments on ‘A Toy Model of Scientific Progress’ by Susanne Lohmann. American Journal of Economics and Sociology 63 (1): 183–187. Stevens, Wallace. 1923. Landscape VI.  From Six Significant Landscapes, Webbed, Among Other Sites, at https://en.wikipedia.org/wiki/Six_Significant_Landscapes. Last accessed 18 Nov 2022. Stringhman, Edward Peter. 2015. Private Governance: Creating Order in Economic and Social Life. New York: Oxford University Press. Wagner, Richard E. 1997, October. Parasitical Political Pricing, Economic Calculation, and the Size of Government: Variations on a Theme by Maffeo Pantaleoni. Journal of Public Finance and Public Choice 15 (2/3): 135–146. ———. 2004, January. Public Choice as an Academic Enterprise: Charlottesville, Blacksburg, and Fairfax Retrospectively Viewed. American Journal of Economics and Sociology 63 (1): 55–74. ———. 2010. Mind, Society, and Human Action: Time and Knowledge in a Theory of Social Economy. London: Routledge. ———. 2016a, Fall. The Peculiar Business of Politics. Cato Journal 36 (3): 535–556. ———. 2016b. Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy. Cheltenham: Edward Elgar. Wagner, Richard E. 2017. James Buchanan’s Liberal Theory of Political Economy: A Valiant But Failed Effort to Square the Circle. GMU Working Paper in Economics No. 17-16. Available online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2956441. Last accessed 1 Aug 2022. Wagner, Richard E. 2018, April. James M.  Buchanan and the Journal of Public Finance and Public Choice: Extending the Italian Tradition of Public Finance. Journal of Public Finance and Public Choice 33 (1): 5–17. Wagner, Richard E. 2019, October. Governance Within a System of Entangled Political Economy. Forest Policy and Economics 107: article 101918. https://doi.org/10.1016/j.forpol.2019.05.004. Last accessed 1 Aug 2022. Weingast, Barry R. forthcoming. Liberty and the Neoclassical Fallacy. Journal of Public Finance and Public Choice. https://doi.org/10.1332/251569121X16571976613141

Community, Pluralism, and Public Reason: An Entangled Analysis of Early Modern England James Lee Caton Jr

Introduction In an age where diversity is often publicly praised, one might take ideological diversity foregranted. Yet, such diversity is a relatively new phenomenon. Consider that when Thomas Hobbes (1962) proposed existence of a social contract, he imagined that society must be subject to a single social contract enforced by a single monarch. Hobbes had observed the chaos that proceeded from an assertion of dominance by English Parliament over King Charles I that ultimately led to his execution and the ascension of Cromwell’s military rule. Not coincidently, Leviathan was published during the Cromwell’s reign. Yet, even after the return of the monarchy under King Charles II, society never quite looked the way envisioned by Hobbes. Parliament had shown itself capable of removing the king, as well as inviting the king’s return. Three short decades later, Parliament would replace a standing king. The height of the monarch was lowered. Ideological unity provided by a unified church ultimately headed by the king proved to be a chimera. I will show that such unity faced significant challenges whose foundations preceded the Reformation. A consequence of the English Reformation, the termination of a coequal relationship between church and state would spell an end to the perpetual legitimation of the ideology that supported this alliance. While transition was by no means inevitable, foundations for a polycentric society that fostered ideological diversity enabled transition to a pluralistic, polycentric order. Coterminous with Thank you to Dragan Miljkovic for his encouragement and skepticism. This work greatly benefitted from referee comments. All mistakes are my own. J. L. Caton Jr (*) Department of Agribusiness and Applied Economics, North Dakota State University, Fargo, ND, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_3

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the development of this order, a shared liberal ideology developed that promoted greater tolerance for ideological diversity. Internal tensions within the old order, enabled emergence of the liberal order. While it is possible that similar tensions could lead to a reversal of the liberal order, Western societies have tended increasingly to foster diversity ever since. To understand community formation requires an alternative to equilibrium theorizing that naively reduces operation and formation of political institutions to perfectly competitive markets (Wagner 1975). I leverage the a contractarian view of diversity in light of its attractiveness as a pillar of entangled political economy (Vallier and Muldoon 2021). The diversity view inherently recognizes an entangled mind which operates adjacent a multilevel social contract (Caton 2023). It is this feature that makes the diversity view most attractive to a program of entangled political economy. The worlds of the moral, political, religious, and economic often overlap, thus, a theory of society must be capable of integrating these domains (Norcross and Aligica 2020). This demands recognition of actors with integrated moral agency that are capable of navigating both their own ideological complex, which includes the domain of public reason. This requires a level of mutual respect among diverse members capable of supporting cooperation in the conversation of public reason (Moehler 2021). The public reason view is a deep and scalable theory of democracy. It holds that community members engage in dialogue either directly or by proxy by which they articulate their support for activity in and transformation of the public sphere. The case of participation in the moral order and in the political community requires public justification of virtue that is mutually acceptable to all communities that are represented in the political community. The shared narrative is shaped by conversation among a diversity of private views wherein participants attempt to find an agreeable conception of the good that unites the political community (Rogers 2020).When discourse goes well – tolerant discourse is not inevitable – diverse agents may express mutual sympathy that indicates an alignment of their particular perspective with regard to the public sphere.

Social Contract in an Entangled Moral Science James Buchanan recognized that economics is a moral science. The term “moral”, in this usage, refers not simply to utility maximizing action, but rather, recognition of ethical-moral constraints (Boettke and Candela 2019). Humans must choose to behave in one manner or another. Economic theory asserts that human agents are value seeking and that human action reveals the values held by the actor. Pure economic theory makes no judgments about human motivation. However, in application, a proper understanding of human motivation and constraints in context is required for making sense of action.1  For a fruitful and humble discussion of the relationship between economic theory and social science, see Dekker’s (2016) investigations of tensions between methodological individualism, institutional analysis, and culture, tensions that continue to challenge social development and that must be confronted by a sincere student of society. 1

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Buchanan (1981, 1983) relates morals to social organization in distinguishing between moral community and moral order. For Buchanan, the fundamental collective unit of analysis is the moral community, whose individual members are united by a social contract that governs their behavior. There are many kinds of moral communities: families, municipal societies, religious organizations, and so forth, all of which weave together to form the society. A community is a relatively intimate group of members that share beliefs and standards of behavior bound in the social contract of the community. Buchanan went as far as to say that member identity is bound up in this collective. The more intimate the community, the greater degree to which those living in the community share a worldview. I will refer to this worldview as ideology. Embedded in this ideology are the terms of the social contract that guide behavior among community members as well as shared narrative by which members interpret and navigate the nexus of shared beliefs (Gauthier 1977). This interpretation of social contract is a positive formulation that forgoes normative assertions of idealist conceptions of social contract. Rather, it identifies the structure and evolution of processes that enable cooperation. It recognizes conditions for and consequences of a lack of voluntary cooperation.2 Exactly how do underlying beliefs guide the evolutionary trajectory of institutions? In Democracy in Deficit, James Buchanan and Richard Wagner (1977) identify that the rules constraining governance in a society depend largely upon the ideological frame. Institutions reflect shared beliefs. In particular, the authors note that the ascendance of Keynesian economics shifted the framing of public discourse from a presumption of fiscal responsibility as the optimal course of business in government toward a presumption that government should be involved in shaping the course of socio-economic development (Keynes 1964). This diminished the extent to which fiscal-responsibility was prized within the American “fiscal constitution” and, therefore, in public discourse. The discussion of Buchanan and Wagner speaks directly to the significance of a theory of ideology as playing a fundamental role in the ordering of social relations, in this case concerning fiscal policy, thus tying together a theme that concerned Wagner early in his career with a theme, ideology, that continues to concern him (Podemska-Mikluch 2023). The “fiscal constitution” is a reference to the social contract with regard to expectations of acceptable behavior by state actors and, therefore, the acceptable bounds within which formal institutions might move. Changes in ideas impact the evolution of institutions. Leighton and Lopez (2013) develop this idea by proposing a process by which ideas and institutions change, noting in particular that academic scribblers shape perception of intellectuals who study and

 Concerning skepticism toward idealist conceptions, see Wagner (2016, 203; 2017, 157–175; 2018, 22–23). Wagner critiques the idealism presented in Buchanan (1975). Buchanan’s (1981, 1983) presentation of moral community and moral order should be viewed as informing the structure presented in Limits. I have argued that Buchanan allowed for both pre- and post-constitutional stages to occur simultaneously (Caton 2020). Unanimity is always contingent upon voluntary participation. According to Buchanan, exit from a community by a discontented individual or contingent is always an option, as is threat, and even exercise, of violence. 2

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accept their theories, thereby shaping public discourse. As ideas are used by policymakers, they are not only integrated into ideology that frames discourse, but may become formally embedded in the state machinery, cementing the presence and significance of these ideas by transforming the state’s relationship to private life of the citizenry. Private and public spheres impinge upon one another (Wagner 2010, 2016). In short, the social contract of a political community defines not only rules governing behavior, but literally sets the terms that constrain and facilitate discourse in that community. The social contract is cocreated among participating community members as “we construct the rules that create the game that we all must play (Buchanan 1979 [1999], 255 cited in Lewis and Dodd 2020).” Across several of his writings, Buchanan (1975, 1979, 1981, 1983; Vanberg and Buchanan 1988) also elaborates a dynamic, multilevel theory of social contract compatible with rational choice theory (Caton 2020). Transformation of social contracts occurs at different levels of analysis as well as at different stages (see also; Moehler 2018, 2020). In the first stage, agents bargain over the structure of power relations embedded in the rules that constrain actions between one another. The establishment of a shared structure of rules constraining behavior is what Buchanan refers to as the constitutional moment that defines the initiation of social contract. Once rules are established and they are known to parties who have submitted themselves to the rule set, those persons necessarily form a community. Before the first constitutional moment, any action that an individual may manifest owing to control of resources, including violence, is permissible as the Hobbesian jungle is the default state of an institutionless world. With the constitutional moment, a moral community pushes back the bounds of the Hobbesian jungle to the domain outside of this agreement. Constitutional exchange consists of bargaining over rules. Much as economic agents aim to arrange the optimal bundle of goods through post-constitutional exchange, they may also improve their own positions by transforming rules through constitutional exchange. More abstractly, transformation occurs by exchange of speech acts (Searle 2008). This exchange includes a persistent effort on the part of an agent or group of agents to develop an acceptable language upon which rests an ideology with a unique set of moral commitments valued by those effectively engaged in and who shape the exchange. Bargaining is necessarily anchored by the status quo, even if bargainers proport the status quo to be illegitimate. It is coordinated by and may alter the social contract. Thus, there exists no single constitutional moment where power relations are settled once and for all. As needs and bargaining power of agents transform over time, each may make demands in light of the power and influence he or she has accumulated and according to the shared understanding that constrains transformation of the social contract. Or, simply the presence of a large interest group may shape political discourse of those wishing to curry favor with a potential base of political support (Wagner 1966). This process affects the structure and allocation of deontic powers. Conformity with the social contract relies largely on voluntary action of bargaining community members, much of which is driven by incentives of existing

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arrangements (Buchanan 1975, 98; see also Rajagopalan and Wagner 2013). These arrangements shape and constrain the use of coercion. Discontented members may threaten to disrupt or to exit from the contract, which may prove a danger to its very existence. If community members feel that the social contract represents their interests, they feel no conflict between their own welfare and the contract’s enforcement. Changing allocations of control and influence over economic and social resources may require transformation of social contract. Successful transformation encourage members to continue to “identify with a collective unity, a community, rather than conceive themselves to be independent, isolated individuals. (Buchanan 1981, 188).” Definition of a new group by exit, presuming exit to be a viable option, requires bargaining between, rather than within, communities. How does ideology both unite members within communities and tie together disparate beliefs between communities? The social contract is a community’s most inclusive institution since everybody is subject to it. Any other agreements in the community, including agreements among members of multiple communities, must be compatible with the social contract, lead to its transformation (which includes its degradation in the worst case), or defer to intermediation via the norms of the moral or political order (Gaus 2011; Moehler 2018, 2020; see also Rawls 1997). Ideological structure focuses expectations of the members participating in this shared vision and may even transform expectations of non-members with whom members of the group interact. Ideological entrepreneurs lead discussion that influences the development of social contract. Hinich and Munger note that ideological entrepreneurs “identify a single issue that unites the apparently disparate disputes into a single cause” and that competition of political ideologies “means competition for universal control, which require universal applicability of the ideology (Hinich and Munger 1994, 64, 72).” Public discourse can enable cooperation amongst those holding otherwise discordant views. These entrepreneurs lead the bargaining process by which language and its moral commitments are broadly accepted or not. Conversations concerning the set of morally justifiable behaviors and the implications of such normative assertions occur within and between communities (see Aligica 2019; Gaus 2021). Change very often starts as a conversation among a contingent of actors submitted to a peculiar set of moral commitments but who otherwise operate within the more general set of moral commitments entailed in the social contract of their society. Changes within one may impact the contract of other communities or impact the moral order by challenging previously accepted moral commitments, thus leading to a cascade of changes. This logic underlies the institutional transformation that we observe in Anglo society and its institutions during the late medieval and early modern periods. Important for discussion of moral diversity, inconsistencies between social contracts binding communities at different levels must be ameliorated (Caton 2020). As we will see with the development of pluralism in England, such evolution is a persistent, varied, and, often, messy process.

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Reformation and Moral Revolution With the development of pluralism in England leading into and after the Reformation, freedom of commerce, freedom of speech, and freedom of religion all found their expression in the weakening of state sanctioned religion and, therefore the power of the alliance of church and state. Parish life had served as focal point in communities across Europe, integrating them into the political system that embodied this alliance. Increasing local autonomy over management of pre-Reformation parish life played a critical role in enabling transformation that followed the Reformation. I will tie this development of local autonomy to Parliament’s growing dominance over the king. Discourse is a means of developing mutual understanding among participants. Broadly understood, it occurs in conversations between individuals, in political speeches, and, often powerfully, in action. Collective decision-making within a community includes “an ongoing, collective process of adjustment, inquiry, negotiation, discovery, learning, and coordination (Aligica and Tarko 2013, 740).” Sometimes, discourse includes rebellion. In practice, discourse is a bargaining over the terms of social contract. The very existence of conversation presumes that two parties can meaningfully communicate. Failing recognition within a conversation, observers can attempt to make sense of this discourse. Discourse can enable the development and adoption of shared abstractions that transcend seemingly incongruous beliefs. This process scales, with development of social contract occurring within a community, between tangential and overlapping communities, and between sets of communities where ideology is substantively shared across each set. The Reformation is the starting point of a cascade of moral transformation in Britain and, of course, most of Western Europe. While Henry VIII exploited the opportunity to declare independence from the Catholic Church, dissidents in Britain increasingly felt emboldened to act independently of both the Catholic Church and the Anglican Church. Likewise, congregational churches provided a new focal point for development of community and ideology (McCloskey 2016, 359–387). In so doing, they challenged the ideological uniformity that would be prized by Hobbes in the following century. But before we elaborate the consequences of the Reformation, we must first ask, how was the Reformation enabled in the first place? To understand the significance and uniqueness of the early modern English milieu, one must first recognize that the pre-Reformation, Catholic world was a total society (Johnson 1976). The rules of the Catholic Church and the wills of its hierarchs were often supported by the force of the state. As part of this church-state alliance, kings and lords might play a hand in selecting, or at least influencing the selection of, the region’s bishop. In mediaeval society the dominance of the landed aristocracy over the Church had been maintained by the ascendancy of the manor over the parish priests. .. The mediaeval rivalries between Church and state never threatened the fundamental stability of the feudal order. (Hill 1964, 191).

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There might be some scuffling between political and religious authorities atop these societies, however, both religious and state actors recognized the importance of maintaining the perception of unity even in the presence of internal conflict (Forrest 2007). There was mutual benefit in stifling dissident views that would weaken the shared dominance of church and state. A combination of state force and a lack of mobility common in the era left little room for an individual to choose his or her community or her own personal set of beliefs. Without the option of exit, these bonds fostered the existence of community. The community was the action arena for many overlapping domains of interaction in parish life. For example, local commerce was commonly conducted within the walls of the local church. Communities exercised limited autonomy. Within a parish, deviant belief or activity could be deemed heretical and, therefore, merit excommunication. “The excommunicated person could not buy or sell, could not be employed, could not sue or give evidence in courts (and so could not recover debts), could not give bail, make a will or receive a legacy or serve as administrator or guardian (Hill 1964, 307).” To ensure its effectiveness, excommunication was enforced by the state. Despite the Anglican Church’s separation from Catholicism, this structure remained. Excommunication, in particular, was an issue that would rouse opposition as protestant congregations sought to localize religious authority. It was a barrier to expression of local autonomy. Before the Reformation, public discourse was limited in English parish life. Ian Forrest outlines limitations to public preaching that indicate limitations also for public discourse, “[t]he practical usefulness of preaching licences lay in the prospect of being able to tell who was a heretic by a simple documentary check. Philosophically the possession or lack of a valid licence symbolized whether the preacher possessed divine authorization (63).” An unlicensed preacher might be brought before “[a]n episcopal judge or inquisitor” to determine whether the message communicated by the unlicensed preacher was heretical (64). Not all speech was restricted as “teaching in private homes was an activity whose legitimacy, content notwithstanding, could be invoked to defend against charges of unlicensed preaching (67).” Such restriction was a key element in preventing the spread and rigorous development of beliefs incongruent with religious orthodoxy and the ruling political elite. These restrictions were particularly important in light of the emergence of dissent from Oxford. In the latter half of the fourteenth century, John Wycliffe, a Catholic priest and scholar, had used his platform in the academy to question Catholic practices with regard to the transubstantiation, priestly largess, de facto restriction of access to scriptures among the laity, among numerous other heterodox propositions that would be a focal point of the Reformation. Wycliffe promoted the ultimate authority of Christian scripture and supported their translation into English. The translation of Wycliffe and his followers was unauthorized. As Wycliffe lamented, “the Friars and their supporters say that it is heresy to translate God’s Word into English and make it known to the common people (2021, 28).”

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Importantly for our discussion, Wycliffe supported the supremacy of the domestic sovereign over the Pope, a view he expressed publicly in Parliament in 1977.3 During King Richard II’s reign, which soon followed, he allowed for bishops to arrest suspected heretics, provision of coercion by local or royal authority was not always consistent and could be complicated by political infighting, sometimes making efforts to persecute heretics ineffective (Forrest 2005, 35–36; 2007). Further, “the king’s council … exercised supervision over the execution of commissions for these purposes and assumed the right to examine suspected heretics.” The state thereby asserted “its control over any action taken against organized heretical teaching (Richardson 1936, 24).” Lollards, followers of Wycliffe, succeeded in fostering sympathy within Parliament in the midst of the campaign against them. A sign of the early development of ideological tension, cooperation between king and Pope was not broadly approved by Parliament (Dahmus 1954). Although Wycliffe’s views were deemed heretical and motivated response of English Catholicism to clamp down on heresy, many of his views were consistent with English institutional transformation that followed the Reformation. They appear to have given voice to sentiment brewing in different corners of English thought, for example, the assertion that the king was sovereign over the church. While there exist little in the way of direct influence of Lollards on Henry VIII, “[m]any of the specific religious reforms enacted by the crown had been called for during the previous century by adherents to the Lollard movement (Wuthnow 1989, 78).” The king’s reforms, though, had received significant support from a Parliament whose activity during the preceding years can only be described as anti-papal. Surely King Henry VIII recognized the likelihood of support from those whose views were shaped by Lollards. Some important sources of local autonomy were well established before the Reformation. The overwhelming presence of the church in  local life meant that establishment of local autonomy occurred within the context of Catholic society. The list of “the responsibilities … of the laity in the later Middle Ages” includes a “staggering list of objects”. According to Duffy, parishioners provided “a lesson-­ book (legend for matins, an antiphonal.. ., a book of sequences, an ordinal or book of instructions on the administration of the liturgy and sacraments, a missal…”, and this is only a fraction of the list enumerated by the author (1992, 132). Independent corporations were established adjacent institutions that were part of the Catholic Church. These corporations played an important role in organizing activity within a parish. They even subsidized priestly activity. Donations aimed at

 Adam Smith would later echo this view:

3

The clergy of all the different countries of Europe were thus formed into a sort of spiritual army, dispersed in different quarters, indeed, but of which all the movements and operations could now be directed by one head, and conducted upon one uniform plan … How dangerous it must have been for the sovereign to attempt to punish a clergyman for any crime whatever. (Smith 1976, 800, 802)

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influencing priestly activity typically “were intended to supplement the existing services (Duffy 1992, 139).” Further, local gilds formed that also funded priests. “By the end of the Middle Ages they [guilds] were as much a rural as an urban phenomenon and most villages had at least one guild (Duffy 1992, 142).” Local churchwardens, officials elected outside of ecclesial structure in order to manage parishioner support for church activities and priests, could not be fired or dismissed by ecclesial authority (Kümin 1996). Precedent for local management that would include selection and remuneration of local priests by non-ecclesial authorities who played a significant role in coordinating parish life, thus, predated the Reformation. Kümin reflects that the late medieval and early modern periods experienced “communilization” that is “defined as a combination of: 1. A set of autonomously developed institutions to meet the specific needs of a territorial unit in town or countryside; 2. A government structure based on a sovereign assembly of householders with powers of legislation, taxation, and election of officials; 3. A tendency to expand into other areas of local concern; and 4. A system of shared values. (1996, 261) Public expression of diverse beliefs before the Reformation was limited. However, the precedent set by Wycliffe, the general allowance for expression of belief in private, and local autonomy expressed by participation in ecclesial life were important precursors that would support diverse expression during the post-­ Reformation era. A modest level of openness to local management and discourse appears to have enabled a cascade of post-Reformation changes in England, including the innovation of ideological autonomy at the level of community that increased the pace of change of beliefs shared at the level of community. Waning access to state-sponsored force by religious authorities not only weakened the Anglican Church, but also the enforcement of ideological homogeneity that had previously defined public expression of belief in parish life. It is not difficult to see how the limited presence of discordant beliefs and limited expression of local autonomy, with modest development and waning state pressure, led to widespread, local influence and oversight with regard to selection and direction of local presbyters as parish of congregational communities was divorced from ecclesial hierarchy. Such local influence, freed from traditional ecclesial institutions, would allow for significant deviations in beliefs between communities, thus enabling moral diversity in Britain. Freedom of religion quickly became bound up with freedom of expression, both of which would weaken the ideological bonds of parish-centered communities. The growing bounds of freedom of speech was particularly challenging to the medieval status quo. Shared belief, including justifications for the existing order, were bound up in the Biblical and liturgical narratives and, failing that, had been held together by coercive power. Weakening of the ability of a state church to impose effective sanctions for deviant beliefs and actions also coincided with a weakening of church authority over the governance of knowledge (Mokyr 2016). Under Catholic governance during early

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seventeenth century, Galileo was censured and placed under house arrest for asserting that the Copernican system, and his own development of it, was not merely an enticing hypothesis. It was true and could be expressed with the same conviction as was expressed for truths accepted by the Catholic Church (Woods 2012, 67–74). In a footnote elaborating Jesuit resistance to scientific developments of the time, Joel Mokyr reflects: The Austrian Jesuit mathematician Chirstoph Grienberger (1561–1636) confided in 1613 to Galileo that ‘I don’t have the same freedom as you’ and his colleague Piero Dini told Galileo two years later that ‘many Jesuits shared his views but have to keep quiet’. (Mordechai Feingold cited in Mokyr 2016, 131)

Yet, Galileo’s work could not be suppressed in an increasingly polycentric world. Post-reformation jurisdictional and religious division, which often coincided with one another, would enable ideas deemed heretical by one set of religious authorities to flourish in pockets protected from those authorities. The English context fostered increases in such decentralization of authority across religious and, we will later see, political and commercial domains. Tyndale’s unauthorized biblical translations provides a significant and informative case of the cascading ramifications of transformation of shared beliefs in late medieval England. Although William Tyndale’s translation was not the first unauthorized English translation – the Wycliffe translation circulated before the Reformation – translation by William Tyndale was politically disruptive because it was translated in the context of growing congregational churches that competed with the Catholic Church and the Church of England. Among other interpretations of ecclesial language controversial to the establishment, the word ecclesia itself was translated by Tyndale as congregation, thus separating the term from the hierarchy whose participants considered themselves inheritors and defenders of Christian orthodoxy (Tyndale 1850).4 Tyndale’s interpretation was indicative of a new basis for development of ideology: communities with growing independence from “high” churches. Tyndale was ultimately executed after a campaign of public censuring motivated by Sir Thomas More. Growing demand for English translation of scripture would go on to impact official policy, with King James I commissioning his authorized translation in 1605.5 Reformation was followed with disputes concerning authority of an officially sanctioning church over knowledge, economy, and scripture. For example, usury, critical to allocating resources toward relatively high valued, only limited exceptions were allowed before the Reformation. In the centuries following the Reformation, its legal definition was changed to include only lending at excessive rates of interest. Lending at interest would gain acceptance and flourish (Munro 2003; see also Grice-Hutchinson 1952).

 The significance of this fact was first pointed out to me by David Levy.  “William Tyndale gave us our English Bible. The sages assembled by King James to prepare the Authorised Version of 1611, so often praised for unlikely corporate inspiration, took over Tyndale’s work. Nine-tenths of the Authorized Version’s New Testament is Tyndale’s.” (Daniell 1994 cited in Levy 2002, n72). 4 5

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Although claims of this grand narrative supported by the alliance of church and state persisted, the assertion of dominance by the sovereign and a lack of connection to the Catholic governance made enforcement less effective. Somewhat ironically, the theory of Divine Right held that the king’s strength was greatest when acting in concert with Parliament. Yet, the dominance of Parliament was expressed in the closing of the Star Chamber in 1641, regicide in 1649, and selection of William of Orange as King in 1689. Hobbes viewed the civil war as the fruit of anarchy. He believed that autonomy expressed by Parliament, by towns and congregations, was not effectively coordinated. The resultant moral diversity and lack of coordination by a single sovereign was, for Hobbes, unacceptable chaos. Yet, this autonomy had become an institutional feature. Political evolution in England during this time reflect growing autonomy of local political units. These institutions supporting this autonomy had already been developed in preceding centuries (North and Weingast 1989; North et al. 2009). In the early seventeenth century, the Court of Wards and Liveries, the institution legitimating allocation by the Crown of land held in fee tail became subject of negotiation. With its abolition, proclaimed in 1646 and finalized with the Statute Abolishing Tenures in 1660, decentralized ownership of land in England became the standard. By the middle of the seventeenth century, significant political strength was exercised independent of the Crown. The Stuart kings bargained away their privileges as royal finances were often strained. When King Charles II reestablished the Stuart line, his return was not so much a victory over the recently deceased Cromwell as it was a capitulation of demands of Parliament. Parliament was no longer assembled by the command of the king, but rather, the king was beholden to the Parliament (Plucknett 1929, 53–58). Charles II lacked the old means of consolidating power through reallocation of property to tenants who owed military allegiance to the king. Instead, the Crown collected revenues by taxing land holders as well as by land sales (Hill 1980, 172–175). The overlapping and conflicting nature of ownership claims was greatly simplified (North et  al. 2009, 77–109). Geoffrey Hodgson (2017) points out, the Glorious Revolution did not on its own usher in an era of secure property rights but, rather, built upon a long and widely embraced legal tradition securing property rights against intervention by the crown. He argues that the legal foundations of secure property rights stretch back to the fourteenth century. These later legal developments further secured and increased the flexibility of these rights. In addition to development in property rights, the Writ of Habeas Corpus was initially issued in 1641 and formally delineated with the Act of 1679 (Hill 1980, 196). These developments were crowning achievements of a centuries-long evolution of laws governing land ownership in England that protected local interests against interventions from the crown (North and Weingast 1989; North et al. 2009; Willman 1983). By the end of the seventeenth century, Englishman were effectively protected from baseless state coercion and ecclesially enforced exclusion. Weakness of the Crown amidst polycentric political competition drove this constitutional evolution (Rajagopalan and Wagner 2013). The Hobbesian ideal was ultimately displaced by liberal institutions.

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To avoid the Hobbesian dilemma requires that groups with varying beliefs could effectually cooperate under a shared framework of governance. Narrow self-interest must be constrained by robust institutions that protect individuals against one another and, especially, an otherwise encroaching state. Emphasis on formal, external institutions misses a critical element of self-governing societies that enable cooperation: self-regulation at the level of the individual and the community. English congregational churches typically promoted a culture of self-regulation that was compatible with and which spread through English culture. Deirdre McCloskey (2006, 2011, 2016) argues that development of Bourgeois Virtue enabled institutional transformation that would support the industrial revolution. According to McCloskey, it was a cultural change that enabled the Industrial Revolution. She emphasizes the transformation of language in the seventeenth and eighteenth centuries that evidence growing respect for commerce and liberty and an embrace of virtue. She notes, for example, increased emphasis on “honesty” and throughout her work argues that commercial activity was held in increasingly high esteem (2016, 235–254). The social contract governing communal life would uplift the role of self-interest relative to the set of Kantian categorical commitments that, supported by the force of the state, had previously held together communal life. “The new communities of sects which ultimately emerged were voluntary, electing and paying their own minister, relieving their own poor, imposing a more rigorous discipline on their own member than the national Church could now do (Hill 1964, 425).” Where before morality was facilitated by uniform belief and punishment of deviation, new sects with varying emphases would be held together by internal commitment, consistent within the community but often at odds with those not sharing the new formulation. This pattern of fervent commitment among minority sects is consistent with the finding that religious diversity tends to support higher levels of commitment and substantive support within religious communities (Ionnacone 1998, 1486–87). Although to us living moderns seventeenth century western Europe seems rather homogeneous in terms of cultural makeup and belief, the splintering of religion into distinct, tightly knit communties and increasing independence of knowledge from centralized control create unique difficulties, both practical and analytical. There had existed an unquestionable narrative where disagreement was punished with force and, often, social exclusion. Observing the disorder that this former system had prevented, one might empathize with the Hobbesian desire for maintenance a single social contract by a strong sovereign. External enforcement by the church-state nexus became an increasingly implausible means of fostering political cooperation. There emerged, instead, a polycentric society as a result of widespread development and demand for self-governing communities.6 Self-interest increasingly became focus of conversations around morals leading into the eighteenth century (Hirschman 1977). Freedom of belief increased

 For a discussion of the relationship of polycentricity to the public reason literature, see Aligica (2014, 24–27). 6

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such that a character like Bernard Mandeville (1962) could pen and publish the Fable of the Bees, which insisted that private vice results in virtuous behavior toward others. One need little imagination to imagine the difficulty Mandeville might have faced had he published his work a century earlier. A society’s moral commitments are implied in the structure of institutions and the language we use to describe a shared conception of human relations defined by these structures. Changing institutions reflect changing beliefs. Across the sixteenth and seventeenth centuries, discourse, aided by the printing press, promoted an unprecedented levels of openness in English society. Whether or not one would claim that freedom of expression had been effectively enshrined in law, such freedom was increasingly practiced. Public discourse reflects sentiments of the new order – a moral order – that had emerged and that would ultimately displace the union of ecclesial and royal authority as a force unifying otherwise separate communities. Institutional transformation would likely not have succeeded had it not been for the inability of the church-state nexus to enforce uniformity in belief. The extollation of virtue and liberty appear to have been coterminous with these institutional changes that increased security of property and person and that advanced regional autonomy. A relatively simple network of patronage wherein members were required to pay homage to king and express loyalty to the Catholic or, later, Anglican Church through word and provision of resources, moved in the direction of a pluralist constitution within two centuries of the Reformation.

New Roles Demand Moral Adaptation When Locke published an early edition of his Two Treatises in 1689, his work was as much an observation of English politics as it was a theoretical contribution. Plucknett describes Locke as the one who “discovered a reasonable philosophical basis for the whole of seventeenth-century history, and more particularly for the Revolution of 1689 (1929, 62).” In the words of F. A. Hayek, Locke’s work was “codification of the victorious political doctrine (1960, 252).” First in practice, then in theory, sovereignty was wrested from the king and autonomy of the individual and the community increasingly expanded. More than ever, standards for and explanations of individual moral character were required. This not just a casual observation. Changing use of language using data from Google Ngrams can be reasonably interpreted as indicating institutional and cultural transformation (Figs. 1 and 2 in chapter “Duality, Liberty, and Realism in Entangled Political Economy”).7 Figure 1 shows, the occurrence of words relating to virtue, liberty, and commerce. Since the number of words in each group is not the same, we should focus attention on the direction of magnitude of changing usage.  Vertical lines in Fig. 6 in chapter “Duality, Liberty, and Realism in Entangled Political Economy” indicate major institutional and political shifts: Execution of King Charles I (1649), Glorious Revolution (1689), and the American Revolution (1776). 7

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Fig. 1  Changing use of words relating to virtue, liberty, and commerce Lines represent centered 30 year moving averages. I define each group: Virtuous: honest, honesty, honor, honorable, love, true, truth, truthful, prudent, prudence, temperate, temperance, justice, faith, hope, pious, piety, moderation, integrity, trust, trustworthy, trustful, considerate, responsible, responsibility, charity, justice, courage, courageous, propriety, courtesy, restraint, frugal, frugality, dignity Liberty: liberty, freedom, tyranny, tyrant, liberal, independent, independence Commerce: market, markets, marketing, commerce, commercial, exchange, exchanged, exchanges, exchanging, trade, trader, trading, trades, traded, dealing, deal, dealer, thrift, price

Fig. 2  Changing use of words relating to commerce, frugality, and propriety Lines represent centered 50 year moving averages. Y-axis values are stretched to compare relative changes. Here, the values for “propriety” include only the frequency of “propriety”. The values of “commerce” include the sum of the frequencies for “commerce” and “commercial”. The values of “frugal” include the sum of the frequencies of appearance for ‘frugal’ and ‘frugality’.

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The increase in prominence of words relating to virtue and the sustainment of the level of usage in the decades surrounding the Glorious Revolution indicate that, indeed, public discourse became increasingly concerned with virtue. Words relating to liberty peak in usage around the time of the English Civil War, only to recede modestly before the Glorious Revolution. Also consistent with the preceding narrative, words relating to commerce and liberty saw a steady increase in usage after the early decades of the eighteenth century, precisely as use of words relating to virtue began to recede modestly. Figure 2 shows the frequency of appearance of “commerce”, “frugal” and “propriety”. Propriety simultaneously relates to polite society and commercial society (i.e., proprietorship). Frugal implies constraint, control, and wise discretion in the use of resources. Business owners must exercise discretion over the use of their resources if they wish to earn a profit. Thus both of these virtuous words have implications for commercial society and, although commerce was used at a higher frequency, changes in usage of these words over time mirrors the usage of the word commerce. The spirit self-governance that emanated through English communities also manifested in emphasis on self-control. A means to promoting this end appeared to be the pursuit of self-interest. I have asserted that this moral diversity requires the sophisticated lens multilevel social contract theory. This lens guides us to search for commonality within the federation of cooperating yet ideologically diverse communities in England during the seventeenth and eighteenth century. We will see that common acceptance of the legitimacy of self-interested activity played a critical role in coordinating cooperation both within and between communities? The embrace of self-interest was the fruit of a conversation spanning many generations concerning the proper role of virtue in public life. Albert Hirschman (1977) observed that the economics of Adam Smith followed a century of discourse concerning The Passions and the Interest. Out of public discourse – an expression of public reason – grew confidence in the belief that if the pursuit of self-interest did not make people virtuous, it tamed the malicious effects of their passions, bringing them to act virtuously anyhow. Preceding Adam Smith’s Wealth of Nations by a half-century, in Cato’s Letters we find that “[w]hen the passions of men do good to others, it is called virtue and publick spirit” (Trenchard and Gordan 1995, 280). Also writing in the first part of the eighteenth century, Bernard Mandeville (1962) offended many with the suggestion that public virtue was not necessary at all. Rather, pursuit of vice made people act virtuously so that others might cooperate with them in their pursuit of self-interest. There developed a liberal response to Hobbes’s concerns. The timing of the transformation of language informs our understanding of the relationship between these ideas and institutions at the time. Starting at least as early as 1660, varying expression of or opposition to moralism contributed to public discourse, in particular with regard to public virtue. Support for the pursuit of private interest and private, or at least local, maintenance of virtue would ultimately enable discussants in this conversation to agree to disagree. Shelley Burt argues convincingly that acceptance of the ability of pursuit of one’s interest to tame the

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passions was the result of a decades long public discourse concerning the role of public virtue. Even before the Glorious Revolution one means of expressing political defiance “was to throng to the churches and chapels of England (Bahlman 1968, 67).”8 Upset with the reign of a Catholic Stuart king, many participated in the Anglican Church as a means of political expression. The earliest instances of widespread moral reform appear in the decades preceding the Glorious Revolution. Not coincidentally, this concern emerged soon after excommunication became an ineffective instrument in governing public morals. Religious societies that operated within the Anglican Church reinforced the faith of members and served as a domain of civic participation. Later groups operating in parallel, typically outside of the Anglican establishment, actively promoted rectification of moral shortcomings, not just of faithful Christians, but of any in society they deemed as having fallen short. As within the Anglican establishment, participation in “low-church” and even heterodox religious organizations became a means of expressing political dissent (Clark 1985). These supporters often desired the coercive enforcement of morals supported by existing laws that had fallen out of use. They still wanted the state to address the behavior of those they considered to have lowly moral character. While these parties may have desired such enforcement, there did not exist widespread agreement concerning such enforcement across English society. Despised by Mandeville, the Societies for the Reformation of Manners sought, often with the support of the political and religious establishments, to make society more moral by enforcing existing laws (Horne 1978, 1–18). Many a sermon was preached in the service of these Societies, and shared effort promoted cooperation between the Anglican establishment and “low church” congregations. This very cooperation appears, at least to Burt, to have legitimated Christian participation outside of the Anglican establishment. Religious activism served as an expression of political autonomy that did not necessitate an attack on kingship, though clearly the emergence of autonomous congregations was at odds Hobbesian notions of the relationship of the sovereign to religion as their presence indicated waning political reach of the Anglican Church. The same religious freedom and freedom of speech allowed radical elements to express views at odds with typical religious sentiment, with extreme views ranging from Arianism to Deism or, in the rare case, Atheism. Despite its theologically orthodox roots, the Anglo liberal order quickly gave way to pluralism; and with this pluralism, diverse conceptions of virtue within particular communities. All major British political parties at the time promoted virtue of one form or another. Reflective of both growing responsibilities of the merchant class across Britain and owing to the nature of politics, public virtue was promoted by Tories who decried the corruption of the Whigs who tended to ally with the interests of the King. Emphasis on public virtue provided an opportunity for a recently empowered

 For useful consideration of religious motivations and perspective in public discourse, see Gaus and Vallier (2009). 8

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political coalition to shape public discourse and conception of the public good embedded in the political narrative through which policy decisions are made and interpreted. A constitutional virtue was proposed by Bolingbroke’s Tory party as a solution to corruption.9 In their attack on Whig corruption, they appealed to a thick commitment to the constitution as a means of promoting a virtuous society. The Tories often found support from the high church establishment (Clark 1985, 277–307). The Whigs, aided by co-author of Cato’s Letter, Thomas Gordon, launched a writing campaign that condemned political corruption while also recognizing it as endemic. Authors supporting the Whig position believed that ‘“Frugality and Industry’ in one’s private life” could reliably support civic virtue amongst the citizenry (Burtt 1992, 125). In public discourse, we observe a campaign in support of interest as a force for promoting self-governance. Not coincidentally, the words “commerce”, “propriety”, and “frugal” all experienced increasing usage throughout the eighteenth century, with peak occurrence reached in the last quarter century for all 3 words (Fig. 1). A moral disposition that set the terms upon which diverse interests could agree was developing. Pursuit of self-interest under conditions suitable toward individual liberty would indirectly facilitate the development of virtue that occupied public discourse through the seventeenth and leading into the eighteenth century. The discourse concerning virtue had recognized the persistence of human passion. Even Trenchard and Gordon, in No. 39 of Cato’s Letters, recognized the trouble that arise when passions find imbalance. They were concerned, though, not only about passion being given free reign at the helm of power, but of persons “who practiced a religious abstinence from all sorts of flesh living or dead… [yet] stir up dissension and war amongst men, to promote slaughter and desolation (1995, 274).” They follow up in No. 40 pleading: We do not expect philosophical virtue from them; but only that they follow virtue as their interest, and find it penal and dangerous to depart from it. And this is the only virtue that the world wants, and the only virtue that it can trust too. (1995, 282)

Pursuit of virtue could, when afforded power, enable more destructive passions. The authors of Cato’s letters put much more trust in the power of incentive, than principle on its own, to induce virtuous behavior amongst self-interest men. Direct promotion of virtue could be an abhorrent danger as “men shew their own unconquerable malignity and selfishness in using them [religious principles] thus (1995, 305).” Likewise, for Hume (1740, 415), “[r]eason is, and ought only to be the slave of passions.” Passion as motivation, from this view, is an inherent part of human existence. A courageous Mandeville was willing to eschew appeal to private virtue all together in his promotion of self-interest. In all discussion of passion from these radicals, the channeling of that passion to productive activity was sufficient to produce, or at least emulate, public virtue. Later in the eighteenth century, Candide recognized, operating from a similar point of view, that for a noble ending “we must go and work in the garden (Voltaire 1947, 143–144).” That is, one must tend to his own  Bolingbroke was privately a Deist.

9

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garden for it is there “that the work banishes those three great evils, boredom, vice, and poverty (Voltaire 1947, 143).” While Enlightenment Deism and Atheism popular amongst intellectuals would not be adopted at large, the prizing of interest’s role in constraining passion and promoting virtuous behavior would survive in popular belief. The discussion of virtue and self-interest finds its most eloquent expression in Adam Smith. Adam Smith’s Theory of Moral Sentiments is highly focused on the problem of passion. Prizing self-control that sounds similar to emphasis from many puritan congregations, for Smith, virtue is best promoted not by external enforcement, but by one’s sensitivity to the impartial spectator. Smith finds that it is the lowly merchant, continually pressed by material constraints, who acts most nobly. In the steadiness of his industry and frugality, in his steadily sacrificing the ease and enjoyment of the present moment for the probable expectation of the still greater ease and enjoyment of a more distant but more lasting period of time, the prudent man is always both supported and reward by the entire approbation of the impartial spectator, and of the representative of the impartial spectator, the man within the breast (1976, 215). Smith compares virtue promoted by industriousness to the passion filled existence in the “superior stations of life”: Those exalted stations may, no doubt, be completely degraded by vice and folly... In the middling and inferior stations of life, the road to virtue and that to fortune … are, happily in most cases, very nearly the same. In all the middling and inferior professions, real and solid professional abilities, joined to prudent, just, firm, and temperate conduct, can very seldom fail of success. (63)

While he recognizes conditions under which merchants may act dishonorably, for example, with attempts to cooperate with other merchants to lessen the pressures of competitions, concern about vice or passion is amazingly absent from the Wealth of Nations. Adam Smith seems, rather, to present a system where vice is marvelously constrained by impersonal forces. Perhaps due to enlightenment distrust of religion  – he was not vocally anti-religious in his writings, but he was skeptical of knowledge not gained through observation (see Smith 1980, 104) – Smith argued most strongly in favor of a shared order that operates without reference to particular traditional communities. While Smith’s writings contain theistic undertones, his appeal was increasingly to universal concepts and mechanisms as his views progressed (Matson 2021). He proposed general, self-efficacious mechanisms such as the impartial spectator, sympathy, and the invisible hand. To the extent that Smith considered the role of shared belief structures and institutions, he typically referred to culture and the state rather than, say, church membership or club affiliation. Stripped of explicit support or opposition to predominate dogmas and laced with generic concepts onto which one might project one’s own theological proclivities, Smith’s work played a critical role in shaping the modern moral order as it was broadly accepted in public discourse. The language supporting public discourse reflected a shared conception of social contract that we know as the liberal order. Consistent with Hayek’s observation that

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Locke simply codified and ideology consistent with historical development, Smith too gave explicit form to ideas that seemed to undergird the maturing liberal order of his time. Belief that industry could push back poverty through the restraint of passion was, and is, an ecumenical perspective that can be shared among diverse communities. Agreement on the terms of debate and discourse established a minimal standard of morality – a shared, abstract conception of the good and means of facilitate it deemed acceptable among members of a morally diverse political community – that shaped development of the Anglo world throughout the eighteenth century.

Broadening Our Conception of Democracy I have applied a dynamic theory of social contract to explain the development and evolution of a pluralist, liberal order. This approach provides structure for confronting entanglement, whether or not the society of concern is itself liberal. It is appropriate to recap themes presented here. Social exchange of all kinds is governed by the social contract of the community or moral order in which interaction occurs. The structures that govern and mediate our thoughts, plans, and behaviors are generated in collective processes that can generally be described as public discourse. Individuals engage in speech acts in the context of a social contract used to interpret and govern social interaction. The very act of engaging in public discourse, broadly interpreted, translates into a vote, great or small, that shapes the social contract. The transformation of social contract yielded from public discourse occurs within a nexus of contracts where these changes may mutually interact. The shared language commonly employed in discourse communicates ontological commitments entailed in the relevant social contract. When certain types of words become increasingly used, then, this reflects increased concern about the domains referenced by this language. The argument presented here should not be interpreted as suggesting attainment of perfection in Anglo society. The new order maintained slavery for more than a century, supported conquest, and failed to vanquish corruption. Liberal societies can develop in a manner not conducive to flourishing. The analysis intends to identify structures and mechanisms that facilitated movement out of the old feudal order and transition into the new, liberal order. This work has leveraged implications of a theory of public reason for a theory of democracy. Democratic expression is reflected in an open public discourse that facilitates participation amongst a broad subset of members in a community or society. It is precisely this sort of democratic engagement that proved threatening to and was stifled by the pre-Reformation status quo. The shift toward congregational forms of Christianity was an expression of ideological autonomy enabled by a weakening church-state alliance. This shift necessitated formation of a moral order that facilitated moral diversity. The moral vacuum this left was filled by increasing

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emphasis on self-regulation and virtue, both of which were later prized by Adam Smith. Despite the tumult that occurred in the middle of the century, this fervor for virtue alongside growing demands for liberty and commerce supported the Glorious Revolution. This fervor continued to transform society in the century that followed by facilitation of a commercial revolution. Expectations transformed such that individuals in Anglo society were obliged toward virtuous behavior. Across the eighteenth century, liberals increasingly accepted that the pursuit of self-interest was the key to promoting virtue and order in society. Without this moral transformation, it is difficult to imagine that a cultural change in the direction of liberty and commerce during the surrounding years would have been sustainable. Still, one must not draw the conclusion that liberal society was perfectly humane. The evolution of language and focus of discourse during eighteenth century occurred alongside the institutional evolution that it appears to have supported. Accompanying growing belief in personal responsibility, democratic institutions increased in prominence at all levels of society as did the breadth of markets. By a conversation of words and actions, individuals voted on the terms of the social contract. This manifested as changes in the definition of religious concepts that defined the structure of community and governance as well as development of property rights that, together, protected and supported increases in local autonomy. Of course, there are many languages and many cultures in which language develops. Future work developing this paradigm may focus attention on different languages. For example, how did the structure of French communities and language change in the century or in the decades leading into the French Revolution? Why did the transformation of French institutions differ from the transformation of British institutions? Might the answer to this question be hidden in changing structure of the nation’s language? How did the languages of other cultures respond to the integration of liberal ideas? For example, can the changing structure of language inform our understanding of the different responses of China and Japan to liberal ideas? Can the language also inform any social predisposition toward authoritarian regimes? I hope that the theoretical structure provided here can inform our interpretation of history and improve our understanding of institutional evolution.

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Richardson, H.G. 1936. Heresy and the Lay Power Under Richard II. The English Historical Review 51 (201): 1–28. Rogers, Tristan. 2020. The Authority of Virtue: Institutions and Character in the Good Society. New York: Routledge. Searle, John. 2008. Language and Social Ontology. Theory and Society 37: 443–459. Smith, Adam. 1976 [1982a]. The Theory of Moral Sentiments. Indianapolis: Liberty Fund, Inc. ———. 1980 [1982b]. Essays on Philosophical Subjects. Indianapolis: Liberty Fund, Inc. Trenchard, John, and Thomas Gordon. 1995. Cato’s Letters: Or, Essays on Liberty, Civil and Religious, and Other Important Subjects. Indianapolis: Liberty Fund. Tyndale, William. 1850. An Answer to Sir Thomas More’s Dialogue: The Supper of the Lord after the True Meaning of John VI and Cor. XI and WM. Tracy’s Testament Expounded. Cambridge: The University Press. Vallier, Kevin, and Ryan Muldoon. 2021. In Public Reason, Diversity Trumps Coherence. The Journal of Political Philosophy 29 (2): 211–230. Vanberg, Viktor, and James Buchanan. 1988. Rational Choice and Moral Order. Journal of Philosophy and Social Theory 2 (10): 138–160. https://www.degruyter.com/downloadpdf/j/ auk.1988.10.issue-­2/auk-­1988-­0202/auk-­1988-­0202.pdf. Voltaire. 1947. Candide, or Optimism. London: Penguin. Wagner, R.E. 1966. Pressure Groups and Political Entrepreneurs: A Review Article. Papers on Non-Market Decision Making 1: 166–179. ———. 1975. State and Local Public Finance: Institutional Constraints and Local Community Formation. The American Economic Review 66 (2): 110–115. Wagner, R. 2010. Mind Society and Human Action: Time and Knowledge in a Theory of Social Economy. London: Routledge. Wagner, R.E. 2016. Politics as a Peculiar Business. Routledge. ———. 2017. James M. Buchanan and Liberal Political Economy: A Rational Reconstruction. New York: Lexington Books. ———. 2018. Buchanan’s Liberal Theory of Political Economy. In Buchanan’s Tensions: Rexamining the Political Economy and Philosophy of James Buchanan, ed. Peter J. Boettke and Solomon Stein. Arlington: The Mercatus Center. Willman, Robert. 1983. Blackstone and the ‘Theoretical Perfection’ of English Law in the Reign of Charles II. The Historical Journal 26(1): 39–70. Woods, Thomas. 2012. How the Catholic Church Built Western Civilization. Washington, DC: Regnery History. Wuthnow, Robert. 1989. Communities of Discourse: Ideology and Social Structure in the Reformation, the Enlightenment, and European Socialism. Cambridge, MA: Harvard University Press. Wycliffe, J. 2021. Being a Pastor: Pastoral Treatises of John Wycliffe. Ed. Benjamin L. Fishcher. Leesburg: The Davenant Press.

The Emotional Decay of Liberalism: Trust, Polarization, and Affective Looping Kevin Vallier

Liberal political order relies on a considerable degree of social trust, that is, our faith that strangers will follow established norms.1 Trust is crucial in societies with diverse religious and moral perspectives. Tribalism pushes us to socialize with people with familiar beliefs, but social trust helps us cooperate with strangers with strange ideas. With too much diversity, the perspectives of others can become incomprehensible. We cannot see how a good faith reasoner can arrive at conclusions at such variance with our own. Excessive viewpoint polarization imperils social trust. And so, it can jeopardize the liberal order that social trust makes possible. This essay outlines a social-emotional, but rational process by which liberalism can collapse. Collapse arises from reinforcing processes of falling trust and rising viewpoint polarization, a process that involves what Karen Jones calls affective looping.2 Distrusting others leads us to interpret their behavior as untrustworthy, which leads to further distrust and polarization. The basis for trust declines, and liberal order with it. The piece begins with an overview of the ideas of social and political trust. I then examine different forms of polarization, distinguish between affective and cognitive polarization, and argue that trust has related components. These components interact. We judge whether others are trustworthy. But when we lack information, we fall back on heuristics. We then consult our emotional responses to others.  Vallier (2020).  Jones (2019). Here I set aside the philosophical and psychological dispute about whether emotions or affective states are themselves belief states, that is, where emotions count as beliefs. I will treat affect and cognition as separate conceptions, which is useful for my purposes. 1 2

K. Vallier (*) Department of Philosophy, Bowling Green State University, Bowling Green, OH, USA © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_4

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This process is problematic. If John affectively distrusts Reba, he will discount observation or testimony of Reba’s trustworthiness. His affective distrust may then produce cognitive distrust. And if he felt forced to rely on his “gut,” for his cognitive trust, his distrust may be simultaneously rational and misplaced. The route from affective to cognitive distrust can stretch across entire societies. When a society becomes emotionally polarized, its members may affectively distrust each other, and they may then, with time, adopt cognitive distrust. Cognitive distrust provides the foundation for further distrust and polarization – an affective-­ cognitive loop. Once I outline this process, I introduce the concept of liberal order and sketch a model society replete with perspectival diversity. Liberal society also governs itself with rules acceptable to all members of the group.3 But an external shock to behavior can produce rule violations, and that shock triggers the process by which distrust and polarization amplify one another. I illustrate with two examples. First, COVID. Implementing mask-wearing and social distancing decreased social trust in the Netherlands. Trust fell among those who agreed with and needed the norms in place. Other citizens ignored the new norms, and those who obeyed and internalized the norms took violations as grounds for mistrust. Here polarized rule-following creates distrust. Trust in the Netherlands is high and may bounce back, but it illuminates how polarization and mistrust can amplify one another.4 The United States provides a more comprehensive illustration. We seem stuck in a doom loop of falling trust and rising polarization.5 My thesis is that liberalism is vulnerable to emotional decay owing to its attempt to reconcile diverse perspectives. Political leaders can exploit this vulnerability by manufacturing grounds for distrust and negative affect. They profit handsomely from their efforts, but the country suffers. I do not know how to solve this problem. But I have a suggestion. We need norms and policies that help citizens convey their trustworthiness to others  – especially those with competing values.

Why Are Falling Trust and Rising Polarization Problems? In this paper, I assume that social trust is good and some kinds of political polarization are bad. Of course, neither claim is unconditionally true. Social trust is problematic when others are not trustworthy, as trust makes one vulnerable to harm. Further, some amount of affective polarization is not only not harmful but optimal. Emotional disagreements can bolster the health of democracies.

 Gaus (2011).  Lo Iacono et al. (2021). 5  Vallier (2020). 3 4

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My first assumption: social trust is good when people can trust one another to follow moral rules. Why? The empirical literature shows that social trust causes many positive social outcomes, which include economic growth, economic equality, low corruption, and higher psychological well-being. My second assumption: polarization becomes problematic when strong negative emotions about others become undesirable. These feelings could become intrinsically problematic if hatred harms well-being. Such feelings could produce worse outcomes. Political gridlock illustrates. If these assumptions hold, the emotional decay of liberalism becomes problematic. In the United States, our social trust is too low, and our levels of polarization are too high. So, the emotional decay of liberalism includes two factors: 1. The decay of valued social trust and social trustworthiness. 2. Irrational and harmful levels of affective polarization. Note that these value judgments do not imply that a rigorous political ideal operates in the background. For instance, I do not assume we should seek a unity of will among moral persons, as found in the classical social contract tradition. Indeed, I reject such ideals on similar grounds as Jacob T. Levy: we can’t have the ideal, and we should not want it.6 Against Levy, I defend a weaker version of the ideal. People have powerful reasons to want to live in socially trusting societies and should also endorse moderate cognitive and low affective polarization. I will not explain the reasons here, as they are easy enough to imagine. We can now develop the paper’s key concepts.

Trust, Social Trust, and Political Trust Trust. I define trust as a three-place relation. A trusts B to engage in some line of conduct only if A depends on B to follow it. A also believes that B acts from moral regard for others, rather than on merely prudential or strategic reasons. I define trust like so: Trust: A trusts B to Φ only when A has a goal and believes (i) that participant B’s Φing is necessary or helpful for achieving the goal and (ii) that B is willing and able to Φ by complying with social norm S where moral reasons are sufficient to motivate B to comply with S.7 To trust, Alf must rely on Betty for his aims, see her action as necessary or helpful for reaching it and believe that Betty is willing and able to do her part. Typically doing her part means complying a social norm or public moral rule. And we often think trustees are trustworthy owing to some moral motivation of theirs, rather than a selfish motive.  Levy (2017, 2020).  Vallier (2020).

6 7

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Social Trust. I take social trust to be a special kind of trust that involves widespread observance of a type of social norm, which I term moral rules. I elsewhere outline my account of social norms that draws heavily on Cristina Bicchieri’s work.8 Moral rules involve directives to obey social rules owing to “reciprocal obligation.”9 We think all group members must observe the rule from our sense of fairness. If I follow the rule, others should too. Moral rules are social rules that meet the following conditions: they evoke distinctively moral affect, people assume that they are categorically binding and not conventions. Moral rules must be seen as advancing the common good. And people often enforce moral rules with social sanction, since violations are regarded as culpable.10 Social trust is mass and mutual: community members place it in all or almost all community members. Large societies seldom have substantive shared aims. So social trust only means that people believe others are helpful or required to achieve their diverse personal goals. I add that we signal our capacity and preparedness to engage in lines of conduct by obeying society’s moral rules. Social trust does not depend on people following any one moral rule, but rather a society’s set of its most salient ones. Social trust thus implies that people believe one another will obey moral rules. So social trust does not imply that we have a certain affective state of rest or security that others will act morally. But some social trust might involve such affective states. Either way, social trust implies that people think one another will obey familiar ethical rules in the proper contexts. To trust his society, Alf must think that others will abide by shared moral rules, and that such widespread obedience help him carry out his plans.11 Social trust per se arrives if most everyone shares these expectations: Social Trust: a public exhibits social trust to the extent that its participant members generally believe that other participants are necessary or helpful for achieving one another’s goals and that (most or all) members are generally willing and able to do their part to achieve those goals, knowingly or unknowingly, by following moral rules, where moral reasons are sufficient to motivate compliance. Societies establish social trust through mass compliance with moral rules.12 Social trust entails the existence of a belief that most have sufficient moral motivation to observe moral rules, ignoring this motivation at moral fault.13 A group socially trusts when they generally think that one another merit their trust. Social trust should not change if people notice one moral violation. My trust concepts are more specific than my argument here requires. Social trust may not include positive attitudes, as it may only presume reliance and expectation

 Bicchieri (2006).  Gaus (2011, p. 171). 10  Ibid., pp. 172–3. 11  The person with the belief need not be aware that she holds the belief, however. 12  At least in combination with certain more ingrained traits, like personality. 13  Social trust may require punishing those who refuse to punish. (Boyd and Richerson 2005). 8 9

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of non-harm. Further, for our purposes, we could appeal to understandings of social norms other than Bicchieri’s, such as accounts within the range defined by Sue Crawford and Elinor Ostrom.14 I rely on my account of trust and Bicchieri’s account of norms because I think they are correct and clear. But my argument does not rest on all the details of my view. Political Trust. Trust theorists also separate trust in society from trust in government. Ordinary people do too.15 I agree with those who draw finer distinctions, including between legal systems (such as the police and judges) and political systems (such as democracy and elected officials), which I call legal and political trust.16 Legal trust is trust in order institutions such as law enforcement and the courts. Political trust is placed in institutions directly affected by the political process. People place political trust in government officials: elected officials, political parties and their leadership, and members of the civil service. Social trust applies to most members of society. So political trust is a kind of social trust, social trust placed in some group of government officials who are themselves citizens. Political trust implies that government officials observe what I term institutional rules. Institutional rules are backed by empirical and normative expectations, but they also constitute institutions and fix their goals. Institutional rules differ from other moral rules because they relate to the public purposes of social institutions. The rules determine how an institution functions and how most think it ought to function. So institutional rules are social norms that help advance an institution’s purpose and values. For example, institutional rules that govern the US presidency direct presidents to pursue office by winning elections and not by using military force. Or to honor their campaign promises. When citizens think presidents flout these norms, they will trust presidents less. An institutional norm of the Centers for Disease Control is to control disease. When the public believes the CDC fails in this way, trust in the CDC will fall. Institutional rules involve moral expectations. Citizens think that people who work in institutions must obey the norms to count as decent people. When people observe norm violations, they will feel the negative reactive attitudes, such as resentment and indignation. Political trust implies empirical and normative expectations that the institution routinely meets its goals.17 Political parties should establish specific laws and policies. Civil servants should help their agencies succeed and succeed honestly.

 Crawford and Ostrom (1995).  Hardin (2004, p. 151). 16  Rothstein and Stolle (2008). 17  This means that the outcome measure is correlated with the competence condition for interpersonal trust. 14 15

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Moral expectations cover both the political decision-making process and the outcomes reached. Empirical research suggests that citizens expect government officials to avoid corruption and treat people fairly, while also reaching substantive policy goals like a certain degree of broad-based economic growth.18 I define political trust like so: Political Trust: a public exhibits political trust to the extent that its participant members generally believe that government officials are necessary or helpful for achieving widely shared political goals and that (most or all) government officials are generally willing and able to do their part to achieve those goals, knowingly or unknowingly, by following institutional rules, where moral reasons are sufficient to motivate officials to comply with those rules. We politically trust when we trust that government officials will observe institutional rules and produce certain outcomes. Political trust can be understood as trust in government. In democracies, political trust is trust in democratically chosen officials and the officials they appoint. So, measures of trust in democracy can be understood along those lines. Political trust is moralized. It includes the normative expectation that institutions respond to moral considerations, such as shared values and procedural rules. Political trust falls when people believe some governmental institution treats them unfairly or unjustly. Perceived mistreatment generates the negative reactive attitudes.

Trust and Affect – Jones’s Model My emotional decay model draws on Karen Jones’s model of trust and affective “looping.” Jones applies her model to interpersonal trust and emotion. She also discusses political trust but lacks a distinct social trust model. My essay extends her views on trust and affect to the societal level. The key to Jones’s model is that our emotional affects shape our trust attitudes. Some emotions, like fear and contempt, “drive out trust,” whereas others, like “esteem and empathy,” drive out distrust. Jones postulates a causal mechanism and an epistemic effect. As she writes, … affective looping works through changing how the agent interprets the words, deeds, and motives of the other, thus making trust or distrust appear justified. Looping influences not only dyadic trust, but also climates, and networks of trust and distrust.19

Trust and distrust shape our interpretation of others’ actions, including their trustworthiness. Trust can self-amplify if it leads us to view others’ behavior as more trustworthy, and the same goes for distrust.  Here I do not mean to imply that other moral concerns will not affect trust levels since people care about more moral considerations than fairness. But we know that fairness matters, which is why I mention it. 19  Jones (2019, p. 955). 18

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As Jones puts it, affective attitudes “function as biasing devices.”20 They shape “both cognition and motivation” because they change “what we experience as reasons for action and belief.” Emotions have this effect because they can focus attention, shape interpretation, and direct inquiry. Then, our value-laden interpretations structure our cognitive inferences, specifically because affective attitudes make inferences seem compelling that otherwise would not.21 For instance, anger tends to “run away with itself.” Anger sees the “reasons that would support it” and overlooks “considerations that might challenge its justification.”22 And so, Jones argues, both trust and distrust are self-confirming. If others see you through the affective “lens of trust,” they will count you trustworthy, and conversely for the lens of distrust. For “trust and distrust cause us to see the other as meriting the attitude.” The resulting attitude seems reasonable, which then reinforces it. Hence, affective looping. I have often set aside affective dimensions of social trust because social trust judgments seem more cognitive and diffuse. But political polarization is often affective and may change cognitive trust through affective trust. This problem is palpable for contempt. Active contempt is totalizing. It “pre-­ empts us from finding even the smallest bits of evidence of trustworthiness.” Contempt reduces optimism about others’ competence. It can also reduce our confidence that others are willing “to be responsive to our dependency.”23 Trust can be self-fulfilling to a greater degree than distrust. Social life often puts trust “to the test” because we can correct trust in response to betrayal. By contrast, social life seldom tests distrust because it creates “withdrawal rather than engagement.”24 Jones and I agree that trust has a unique power to get us out of a fix. Jones disagrees with theorists who think trust rests on “shared values or norms.” If trusters and trustees need to share values and norms, trust in pluralistic societies should be overwhelmingly difficult. But for my and Jones’s accounts, no such requirement is in place. I have argued that social trust requires an expectation of shared compliance with social norms. Yet people can adopt those norms from different points of view. We can create trust across differences by not demonizing differences, since we otherwise invite “contempt or fear.”25 Here are the elements I adopt from Jones’s model. First, affective attitudes are biasing responses, and so trust and distrust can reinforce themselves. My model allows interplay between cognitive and affective trust and polarization. Second, I agree with Jones that specific affective states, like fear and contempt, can drive out trust. Third, political leaders can alter trust by provoking emotional responses. I will now build my own model, but bear my points of agreement with Jones in mind.  Ibid., p. 958.  Ibid., p. 959. 22  Ibid. 23  Ibid., p. 962. 24  Ibid., p. 960. 25  Ibid., p. 964. 20 21

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Affective and Cognitive Polarization and Divergence In common phrasing, political polarization refers to two phenomena: polarization and sorting.26 Polarization means that people change their minds on issues, or they strengthen political group loyalty. Sorting occurs when people with the same views and loyalties associate more with the like-minded, say by joining a political party that aligns more with their values. Polarization implies a change of attitude, sorting a change in membership. Many polarization researchers distinguish between issue- and affect-based polarization and sorting. Issue-based polarization happens when we adopt more conflicting stances on issues. Affect-based polarization only occurs when people adopt new political identities that lead them to have negative affect towards other groups. Issue-based sorting occurs when people sort owing to their views one issues, whereas affect-based sorting occurs when people sort owing to negative emotional responses towards others. We can call all four phenomena – issue-based polarization and sorting and affect-based polarization and sorting – partisan divergence or just divergence. Also note that divergence can occur at the elite and mass levels. The big story in American politics over the last half-century is the rise of enormous partisan divergence at the elite level. Most divergence appears affective and leads people to magnify the perceived differences between themselves and others on issues. We are chiefly emotionally rather than intellectually at odds. People disagree about where partisan divergence came from. Many factors are at work, like  political realignment in the South, increases in economic inequality, more racial diversity, and greater party competition at the federal level. That leaves us with few avenues for reform, an important matter I return to below. Connecting the last two sections, I think that falling trust and increasing partisan divergence mutually reinforce one another. Falling trust creates more divergence and divergence engenders falling trust. I review some evidence to this effect elsewhere.27 I also offer a distrust-divergence hypothesis: that social and political distrust and partisan divergence mutually reinforce one another. My aim, then, is to extend the distrust-divergence hypothesis into a plausible cognitive story about how trust and polarization trigger one another. I appeal to cognitive and affective elements of the human person. On this basis, we can identify a psychological and social channel by which liberalism can decay. Decay arises from the affective and cognitive strains of living in a society of people with diverse beliefs and values.

26 27

 McCarty (2019).  Vallier (2020), Lee (2022).

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Judging Trustworthiness – Affective and Cognitive Components Diverse societies must find a shared basis for trust. People with competing worldviews may see others as alien. In small groups, we rely on repeat interactions and close relationships for cooperation. Deliberation and ritual can also help. But in large groups, most interactions are with strangers. The mechanisms that produce local, particularized trust do not work. Diverse strangers need a method to convince one another that each of us merits trust. Trustworthiness in a diverse society depends on compliance with social norms. Social norms are norms we only prefer to follow so long as others do.28 Following social norms burdens us. Compliance demonstrates approval of the norm, and it may even indicate values that motivate compliance. Thus, we deem others trustworthy when we see them follow salient social norms. When everyone accepts certain norms, compliance convinces others to trust. But observing norm violations can reduce trust. Trust may erode quickly if norm obedience changes quickly, say owing to exogenous social shocks that I address below. Rule-observing behavior can be ambiguous in several respects. First, rule compliance will not reveal why people obey the rules, since some may act from conviction, but others not. Worse, whether someone follows a rule can be ambiguous. Honesty norms illustrate. Some people are good liars. A third source of ambiguity occurs when people disagree about how to observe some norm. It is, to some extent, up to us whether we interpret the behavior of others as trustworthy. I do not mean that we can consciously choose how we respond to observations of others’ actions. Indeed, most processes may be automatic, “system-1” level responses.29 But here’s a problem. Such reactions might form from prior expectations about behavior. If we distrust others, our experience will not dis-confirm our distrust, even if others behave in what they regard as a trustworthy fashion. Our observations of strangers’ trustworthiness draw on our prior beliefs about their trustworthiness. Subsequent trust judgments arise in part from prior trust. Politicians, media, and other influences play a critical role in this process. This part of the model draws on Bicchieri’s account of norm change, which often occurs through the leadership of “trendsetters.”30 Politicians and media can create, enforce, or change norms. They often manipulate information to create polarization and distrust, though they can sometimes attune polarization and trust to optimal levels. If we focus on affective change, we can explore how trendsetters cause emotional decay. Liberalism decays through open democratic channels. Leaders can sow distrust and polarization to turn out their base, and politicians can win elections through base enthusiasm rather than broad support. Turning out one’s base is not a bad thing. But it can facilitate emotional manipulation that can harm trust.  Bicchieri and Muldoon (2011).  Kahneman (2011). 30  Bicchieri (2016). 28 29

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We need norms of forbearance that discourage politicians from provoking distrust to get votes. They can also deter media from generating distrust to get viewers. We need standards of good governance where people fear sanction for divisive behavior. Such measures block cognitive distrust by provoking less affect. Another feature of Bicchieri’s account of norm change merges well with Jones’s model of affective looping. Bicchieri stresses the importance of trendsetters in reference networks. One can understand a reference network as one of socially connected individuals – people from whom we seek consistent approval. Note that societies need not decay into a doom loop. We can trust others and interpret their behavior as evidence of trustworthiness, and in those cases, positive trust beliefs plus observation can strengthen trust. The point is this. Trust and distrust can self-amplify, producing cascades of trust or distrust across populations.

Settled Cognitive Distrust Affective polarization and affective distrust threaten a stable, diverse order. Our affective responses change behavior. Intellectual ruminations matter less. System-1, as Daniel Kahneman has taught us, is the more fundamental system. System-2 efforts to master system-1 are a challenge, and they often fail without us realizing it. One problem is that beliefs formed by system-1 get rationalized by system-2. Without clear evidence, system-1 responses need not be irrational. System-1 produces an adverse emotional reaction to ambiguous behavior, system-2 interprets this as untrustworthiness, then, on reflection, one takes one’s emotional reaction as evidence of untrustworthiness. In this way, affective distrust can alter cognitive trust, and it does so without any mental or rational malfunction. If behavior is ambiguous, one can take several rational attitudes towards others’ behavior. Affective distrust can push us in negative but rational directions. System-2 reasoning can tamp down on problematic system-1 reasoning, but if affective distrust produces cognitive distrust, system-2 may not object. Deciding to trust someone is difficult when we have affective distrust, something most people have experienced when we try to trust someone who has disappointed or betrayed us. It can take enormous effort, and we are not always successful. Many people take others’ behavior as further reason to distrust them and develop settled cognitive distrust. In that case, both system-1 and system-2 produce distrust. A dual system trap. Opinions can settle when system-1 and system-2 agree. If we doubt our careful reasoning, we could consult our “gut.” And to verify our instinct, we reason. Here system-1 and system-2 reinforce distrust, even the distrust in reflective persons, if not moreso. These individuals will think and feel that we cannot trust others even if others are, in fact, trustworthy. That’s the puzzle. We can rationally distrust others even if they are trustworthy. This occurs when we face a cognitive fog of ambiguous behavior – political polarization drives emotional reactions against political tribes. Once distrust settles, it

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can last. Some empirical research suggests that social trust hardens in early adulthood.31 If so, our cognitive and affective judgments may create stable trust or distrust. We have evidence that personal trust in others can vary across one’s lifetime.32 But trust can fluctuate around a set point. The result is stable social trust attitudes at the national level, a pattern found worldwide. It is hard to alter social trust beliefs. No one knows why this pattern persists at the macro-societal level. Trust in institutions can vary in response to observation and media reports, which can sow distrust when government agencies are trustworthy. But media can also create more trust. Since we can change political trust, and since social trust correlates with political trust, they may cause one another. Societies might change social trust through policy, say through corruption reduction. But if we fall into distrust and divergence, political trust will fall too. Extreme polarization may lead people to interpret improvements with cynicism. For example, Democrats may be unable to convince Republicans to trust them, even if they improve performance. If so, social and political trust can amplify polarization and vice versa.

A Model of Liberal Order Liberal order relies on considerable social and political trust, and to preserve trust, it must limit polarization. How, then, can liberalism stabilize with high trust and low polarization? One model, which I have defended elsewhere, works as follows.33 If people all accept the norms of liberal institutions, they can sustain trust between diverse perspectives. Consider two examples. Since liberal governments are democratic, people feel they can influence government, which provides grounds for trust. Since liberal orders honor religious freedom, diverse groups will see their government as fair. Christians, Jews, and Muslims can co-exist. They cooperate more effectively than in a coercive establishmentarian regime. Let’s generalize. A liberal order has four features. It is liberal because it protects a wide range of individual and group liberties. It is democratic because a majority chooses political leaders and because a majority of leaders choose laws and policies. It is a market order because it honors a right to private property in capital and produces and distributes goods through a system of profit-and-loss. The market system is innovative and productive. Finally, the liberal order has a welfare state that reduces poverty and limits social risks like illness and unemployment.

 McLaren (2017).  OECD (2017). 33  Vallier (2019). 31 32

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Each institution contributes to trust in a host of ways. Liberal rights ensure that no group feels dominated by the government or one another. People believe institutions treat them as equals. Democracy can convince people they control their government and that their leaders will respect their views and values. Democracy also allows people to hold officials responsible for bad performance. Holding leaders accountable creates more functional governments. Trust gets a boost. Effective democratic decision-­ making has similar effects because policies flow from an elected parliament, not a dictator. Markets create wealth. Then wealth generates trust by producing peaceful exchanges with strangers.34 Wealth creation also helps people feel economically secure, and they also feel safe from domination by others. They enjoy a rising standard of living. Markets also produce the wealth required to help other institutions function well. Markets stripped of social insurance can produce distrust by producing economic inequalities. Many see these inequalities as unfair. They leave people behind, and those people feel their society has betrayed them. Markets also allow for corporate misbehavior in the absence of government monitoring, such as rent-seeking. So, the welfare state helps markets build trust by removing some of these dangers. By creating economic security, these programs create opportunities for trust. But trust can fall if the welfare state redistributes wealth unfairly, say by wasting tax funds. If a society has middling or high social trust, liberal order should reinforce that trust. The system can also contain polarization. Democracy can exacerbate disagreement. But voting systems can tame polarization by giving elected officials reason to compromise. America struggles with polarization in part because our voting system discourages compromise between competing parties. Our system contrasts with German democracy. Our special first-past-the-post voting rules undermine robust third parties, creating an us-vs-them dynamic between our two major parties. So, we should assume our liberal model contains a proper voting system. The system encourages coalition formation, compromise, and third parties. In most established democracies, cognitive and affective factors reinforce trust and reduce polarization. Low polarization keeps the values and policies of parties closer to the political center, and voters find it easier to imagine how others could disagree in good faith. Higher social trust reverberates throughout all institutions, creating positive interactions with others, which builds more trust. High trust creates expectations of positive behavior in systems like the civil service. Favorable policies further boost confidence in government. Since the government is democratic, a competent government can help boost trust in most people. This boost holds when trust in police and judges is high. But we also need norms of forebearance among political officials, media, and other influencers.

34

 Agneman and Chevrot-Bianco (2022).

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The reader should now be able to see how positive feedback loops arise from high trust and low polarization. Both societies and leaders play a critical role in this process.

Exogeneous Trust Shocks Most liberal democracies seem to be in the social state I describe. Cognitive and affective trust and moderate polarization reinforce each other. Trust can remain high and stable, save during major shocks like wars or recessions, and social trust may remain stable regardless. Parliamentary voting manages polarization. And so, by and large, liberal democracies do not face low trust and high polarization. The United States, however, may have entered a negative feedback loop. But before I discuss the US, let’s examine the idea of an exogenous trust shock. An exogenous trust shock is an event that leads to widespread norm violations: the flouted norms formed the basis for trust between diverse perspectives. One straightforward case is a response to a natural disaster or a war. In such cases, many people lose access to essential resources. They may start to steal food, violating anti-theft norms, whereas others may use violence to pre-empt coming to harm. That fear alone can trigger violent responses. Governments can also sow distrust, especially in totalitarian societies. Totalitarian states pit neighbors against one another. They may create secret police forces and encourage people to report on one another for disloyalty. Germany illustrates. East German trust remains lower than Western German trust. One reason is that, by 1989, 5% of East Germans were secret police.35 People did not know who they could trust because 1-in-20 people could threaten their essential well-being. Communism destroys trust for this reason.36 People often band together during national disasters. An external threat can build trust through cooperation. This is why post-WW2 social trust in the United States may have risen so high.37 We were barely attacked or were not divided by the war after it began. Once it began, the war faced little domestic opposition, then we won and became the global superpower. Next came broad-based economic growth, low government corruption, and smooth elections. These factors built trust in others. In contrast, communist countries saw trust decline partly because they experienced the opposite phenomena. We have a model of liberal order. Liberal procedures, both voting and the rule of law create trust in government. And can raise social trust. But if we introduce a shock, then rule violations may proliferate. In this case, “All is fair in love and war” is not entirely true, as we may bring our expectation of trustworthy behavior into a

 Williams (2019).  Bjørnskov (2019). 37  Putnam (2021). 35 36

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military conflict. Nonetheless, when we see behavior change, we then lower our trust. Once a society observes massive norm violations, most people can no longer trust those with diverse values because few can display their trustworthiness. To protect themselves, many will retreat into smaller, more homogeneous groups. These groups will surround themselves with particularized groups we know we can trust, such as a religious or ethnic group or a political organization. Withdrawal can instigate further polarization owing to more time spent with the like-minded. This process, in turn, triggers affective distrust, which creates cognitive distrust – the end state: settled rational distrust of diverse others.

The United States The study of polarization in the United States is rich and continues to advance.38 The story polarization scholars tell is no surprise. Over the last 50 years, we have seen an enormous increase in affective polarization at elite levels and a more modest increase in issued-based polarization. (Again, issue-based polarization denotes the distance between different groups on policy matters.) Polarization can grow as one engages in political debate, discussion, and activity. Both forms of polarization threaten trust, but affective polarization is much worse. It creates irrational snap judgments, which can create distrust even if others are trustworthy. Issue-based polarization only indicates that people disagree, not that they are untrustworthy. Affective polarization can destroy peaceful deliberation and consensus, which exacerbates issue-based polarization. Issue-based polarization can trigger genuine frustration with others, leading people to blame one another for mistaken judgments. American institutions do not always help. Polarization can grow strong in two-­ party systems where people form two political tribes. We have not always been so polarized. But our system facilitates it. Distrust and polarization have many varied causes. But I argue that rising polarization helps lower social and political trust. I also think the polarization arises from a widening gulf of moral views in the US. Some think these disagreements show that others cannot be trusted. Distrust and polarization fuel one another. Bad actors often amplify both forms of polarization. My story fits trends in the United States. We were in a low polarization, high trust state in the 1950s and early 1960s. The late 1960s led to change. Nixon’s southern strategy broke the South out of the control of the Democratic Party. The GOP became nationally competitive. Stiff political competition did not produce moderation, but the reverse.

38

 McCarty (2019).

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Disagreements about sex, abortion, and race began to divide the country. Baby Boomers pushed the country left on social issues, but more traditional groups resisted. And these groups merged into the Christian conservative groups within the GOP today. Polarization on economic issues also mattered. Pro-market sentiment proved more robust and long-lasting than in other democratic societies. Combined with the stigma on socialism, the US did not become a social democracy or even adopt universal health insurance, although the Democrats have supported the policy for almost a century.

Conclusion Liberal orders can decay from interactions between cognitive and affective trust and polarization. My model is too simple, however, as I treat forms of trust and polarization as aggregates. But individuals in these societies have different levels of trust and polarization. Further, my model must address insights from complexity economics.39 Social variables in complex systems seldom have simple, predictable causal relationships. We must start somewhere though. My simple model still helps illuminate a process that might well be underway in the US. Now, how can we stop the problem? Containing distrust and polarization requires changing social norms and public policies. One must begin by changing norms and policies that are not the subject of public rancor. Policymakers should seek opportunities to change out-of-the-way practices. And they must prevent these practices from becoming yet another source of acrimony. One way to proceed is to locate policies that achieve goals important to both the political right and left. One example is zoning reform.40 These policies allow people to build more urban housing. The case for reform is simple. Housing is far more expensive than it needs to be, which makes everyone poorer but the urban rich. Restrictive zoning prevents keep people from taking high-paying urban jobs. Such jobs would extend the division of labor and raise the economy’s productivity. These jobs would also increase economic equality by raising workers’ wages and lowering the real estate wealth of the urban rich. Incomes would compress. Owing to “NIMBYism,” cities like San Francisco refuse to allow more houses. The San Francisco rich have fought reforms. But the opposing YIMBY movement seems effective, as it is somewhat bipartisan. Real zoning reform is finally happening. Perhaps economic growth and equality will rise together.

39 40

 Colander and Kupers (2014).  Vallier (2020).

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Since right and left get more of what they want, we can expect more trust in the government. With more economic diversity in cities, intergroup contact might engender more social trust.41 Another potential solution is micro-targeted campaign finance reform. Most people think there is too much money in American politics, and this perception creates distrust in the system, especially on the left. But not all campaign finance reforms are created equal. Political scientists find little evidence that donations “buy” votes from experienced politicians. Much of the money donated in elections cancels out when compared to money spent by the other side. And so, it is hard to tease apart the effects of reforms. One manageable problem is negative agenda-setting. Negative agenda-setting occurs when legislators do not allow bills to come up for a vote. House speakers might make an agreement with special interest groups: they keep specific bills off the docket in exchange for campaign contributions. Special interest groups can control policy while hiding from public view. How can we limit this activity? One option: limit the jobs that speakers can take once they leave office. Or bar them from lucrative jobs after leaving office. One need not impose a permanent restriction, as a five-year delay might have a powerful effect. I prefer more targeting. A bill could place income limits on the jobs one takes after office. States could also ban agenda-setters from working for groups that were former donors. Targeted campaign finance can improve the democratic process, and such reforms seldom evoke polarized responses. No one policy is a panacea. We must find bipartisan, non-polarized policies that can build trust and reduce polarization. Without these policies, liberal order may emotionally decay. Maintaining a diverse open society is not easy, as illustrated by the fact that we struggle to tell whether open societies exist. Few communities have self-conscious and deep commitments to broad toleration. Maybe open societies are still being born. The US is, in some ways, the most open of all societies. It has enormous religious, moral, and ethnic diversity and an express commitment to maintaining open institutions. Fans of open communities worldwide track developments in the American open order. Right now, the US regresses. American society suffers from falling trust and rising polarization. Or so I have argued. Diverse societies need rules that all can accept. Obeying those rules then helps to sustain trust and contain polarization. But today, we observe reinforcing affective and cognitive distrust, which then interact with affective and issue-based polarization. These factors divide our society, and they are gaining steam.

41

 Pettigrew and Tropp (2006).

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References Agneman, Gustav, and Esther Chevrot-Bianco. 2022. Market Participation and Moral Decision-­ Making: Experimental Evidence from Greenland. The Economic Journal: 1–63. [update when published]. Bicchieri, Cristina. 2006. The Grammar of Society. New York: Cambridge University Press. ———. 2016. Norms in the Wild: How to Diagnose, Measure, and Change Social Norms. New York: Oxford University Press. Bicchieri, Cristina, and Ryan Muldoon. 2011. Social Norms. http://plato.stanford.edu/entries/ social-­norms/. Bjørnskov, Christian. 2019. The Political Economy of Trust. In The Oxford Handbook of Public Choice, ed. Roger Congleton and Bernard Grofman. New York: Oxford University Press. Boyd, Robert, and Peter Richerson. 2005. The Origin and Evolution of Cultures. New  York: Oxford University Press. Colander, David, and Roland Kupers. 2014. Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up. Princeton: Princeton University Press. Crawford, Sue, and Elinor Ostrom. 1995. A Grammar of Institutions. American Political Science Review 89 (3): 582–600. Gaus, Gerald. 2011. The Order of Public Reason. New York: Cambridge University Press. Hardin, Russell. 2004. Trust and Trustworthiness. New York: Russell Sage Foundation. Iacono, Lo, Wojtek Przepiorka Sergio, Vincent Buskens, Rense Corten, and Amout van de Rijt. 2021. Covid-19 Vulnerability and Perceived Norm Violations Predict Loss of Social Trust: A Pre-Post Study. Social Science and Medicine 291: 114513. Jones, Karen. 2019. Trust, Distrust, and Affective Looping. Philosophical Studies: 1–14. Kahneman, Daniel. 2011. Thinking: Fast and Slow. New York: Farrar, Straus and Giroux. Lee, Amber Hye-Yon. 2022. Social Trust in Polarized Times: How Perceptions of Political Polarization Affect Americans’ Trust in Each Other. Political Behavior: 1533–1554. Levy, Jacob T. 2017. Against Fraternity: Democracy Without Solidarity. In The Strains of Commitment: The Political Sources of Solidarity in Diverse Societies, ed. Keith G. Banting and Will Kymlicka, 107–124. Oxford: Oxford University Press. ———. 2020. Contra Politanism. European Journal of Political Theory 19 (2): 162–183. McCarty, Nolan. 2019. Polarization: What Everyone Needs to Know. New  York: Oxford University Press. McLaren, Lauren. 2017. Immigration, Ethnic Diversity, and Inequality. In Handbook of Political Trust, ed. Sonja Zmerli and Tom W.G. van der Meer, 316–337. Northampton: Edward Elgar Publishing. OECD. 2017. Oecd Guidelines on Measuring Trust. Paris: OECD Publishing. Pettigrew, Thomas, and Linda Tropp. 2006. A Meta-Analytic Test of Intergroup Contact Theory. Journal of Personality and Social Psychology 90 (5): 751–783. Putnam, Robert. 2021. The Upswing: How America Came Together a Century Ago and How We Can Do It Again. Simon & Schuster. Rothstein, Bo, and Dietlind Stolle. 2008. The State and Social Capital: An Institutional Theory of Generalized Trust. Comparative Politics 40 (4): 441–459. Vallier, Kevin. 2019. Must Politics Be War? New York: Oxford University Press. ———. 2020. Trust in a Polarized Age. New York: Oxford University Press. Williams, John Michael. 2019. Die Mauer Im Kopf: The Legacy of Division in German Politics. Atlantic Council. www.atlanticcouncil.org/commentary/long-­take/ die-­mauer-­im-­kopf-­the-­legacy-­of-­division-­in-­german-­politics/.

Toward a Constitutional Theory of Property Rights to Escape the Transitional Gains Trap: A View from the Machiavellians Rosolino A. Candela

The uniqueness of the status quo lies in the simple fact of its existence. The rules and institutions of sociolegal order that are in being have an existential reality. No alternative set exists. This elementary distinction between the status quo and its idealized alternatives is often overlooked. Independent of existence, there may be many institutional-legal structures that might be preferred, by some or many persons. But the choice is never carte blanche. The choice among alternative structures, insofar as one is presented at all, is between what is and what might be. Any proposal for change involves the status quo as the necessary starting point. “We start from here,” and not from someplace else. – James M. Buchanan (1975: 78)

Introduction Since at least Adam Smith, political economists have inquired into the nature and causes of the wealth of nations. In recent years, a growing literature in both state capacity theory and the economics of violence have arisen to explain the institutional conditions and the historical circumstances that gave rise to economic development, constitutional democracy, and the rule of law, first in Western Europe. Taken together, these two theoretical approaches seem to run orthogonal to classical liberalism as an analytic point of departure, since, from a classical liberal standpoint, voluntary exchange is the organizing principle of both political and economic processes. To suggest that violence can be a productive means for organizing society, as argued by Frederic Lane (1958: 402), seems to lend credence to the notion R. A. Candela (*) Mercatus Center, George Mason University, Fairfax, VA, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_5

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that only the coercive power of the state can establish the preconditions necessary for economic development. Fortunately, James Burnham’s The Machiavellians: Defenders of Freedom (1943) covered the same analytical ground that has been resurrected by state capacity theory and the economics of violence, and in a manner consistent with classical liberal scholars working in the public choice tradition. Burnham provides a Machiavellian basis of political realism, which frames political theory in terms of a struggle of ruling classes striving to maintain their own power and privilege. But as suggested by the subtitle of the book, Burnham provides the theoretical tools to construct a realistic historical account of how and why the institutional conditions for economic and political liberty have emerged against the intent and self-interest of political elites. “If the political truths stated or approximated by Machiavelli were widely known by men,” Burnham states, “the success of tyranny and all the other forms of oppressive political rule would become much less likely. A deeper freedom would be possible in society than Machiavelli himself believed attainable” ([1943] 2020: 69–70). From a public choice perspective, Burnham’s thesis could be understood as an account about the economic transition from poverty to wealth but framed in terms of an escape from the transitional gains trap (Tullock 1975; Tollison and Wagner 1991). Understood this way, the question of why the West first escaped from poverty is a question into how the political process gradually transformed from a means to secure privileges among political elites into a means to secure private property rights under constitutional democracy. Such an inquiry implies that any realistic inquiry into economic and political development must entail a study of how and why violence becomes organized throughout society in the foreground of analysis. Taking inspiration from Burnham’s The Machiavellians (1943), I will offer a constitutional theory of property rights grounded in classical liberal theory, one that emerges as a by-product of political exchange and entrepreneurship (Wagner 1966). From a constitutional perspective, I argue that private property rights emerge to internalize the cost of using violence, particularly to minimize rent dissipation from escaping the transitional gains trap. I illustrate this argument through the lens of entangled political economy by explaining the emergence of constitutional democracy in Western Europe as by-product of political exchange.

J ames Burnham and the Machiavellians: An “Imperfect” Vision of Political Processes Although Burnham’s The Machiavellians is not meant to be an explicit contribution to classical liberal political theory, in this section, I will attempt to render explicit in Burnham particular aspects of a theory of political processes that illustrates the historical evolution towards political and economic liberty, particularly as it first emerged in the West. One way of doing so is by beginning with a quote from Frank

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Knight, often used by James Buchanan, which goes as follows: “To call a situation hopeless is equivalent to calling it ideal” (Buchanan and Tullock 1962: 204). Though not implied by Knight, such an understanding of public choice theory lends itself to a standard interpretation, to quote one textbook, that “the characterization of the political process by public-choice theorists is, perhaps, excessively cynical” (Salvatore 2003: 622). However, to assume behavioral symmetry between actors across market and non-market settings implies neither cynicism nor an inevitability of dysfunction in political processes. Rather, it is quite the opposite. An appropriate understanding of the public choice revolution, as reflected in the work of its pioneers, James Buchanan and Gordon Tullock, can be illustrated by taking the inverse of Knight’s quote: a situation that is non-ideal, or “imperfect” in the sense of being “incomplete” or “not thoroughly done” according to its etymological roots in Latin, is one that builds hope into its narrative! Such hope for improvement has a non-normative basis in political entrepreneurship (Wagner 1966). The meaning of “imperfect” alluded to here is clearly implied in Burnham: “Political life, according to Machiavelli, is never static, but in continual change. There is no way of avoiding this change. Any idea of a perfect state, or even of a reasonably good state, much short of perfection, that could last indefinitely, is an allusion” (Burnham [1943] 2020: 56). Though there is no explicit account of political entrepreneurship in Burnham, he draws his inspiration from Machiavelli as follows: “political man of the ruler-type1 is skilled at adapting himself to the times. In passage after passage, Machiavelli returns to this essential ability: neither cruelty nor humaneness, neither rashness nor caution, neither liberality nor avarice avails in the struggle for power unless the times are suited” (Burnham [1943] 2020: 55). Thus, if political theory is a science about the means to acquire and preserve power among ruling elites, then the political entrepreneur is an agent that discovers opportunities to apply the most appropriate means to increase their wealth and security. However much Burnham’s Machiavellian-inspired account of “political man” may be motivated by their self-interest, namely to acquire and preserve power, like in public choice economics, this is an analytical device intended “not for its accuracy in prediction, but for its assistance in helping to identify and to classify patterns of outcomes attributable directly to institutional differences” (Brennan and Buchanan 1981: 163). As Burnham writes, as “protectors of liberty, Machiavelli has no confidence in individual men as such; driven by unlimited ambition, deceiving even themselves, they are always corrupted by power. But individuals can, to some extent and at least for a while, be disciplined within the established framework of wise laws” ([1943] 2020: 63). An understanding of how such institutional conditions can emerge in an incentive-compatible manner, but also in a manner that sows the seeds for constitutional democracy and private property, requires that political entrepreneurship moves to the foreground of analysis. This, in turn, requires that the  Elsewhere, Burnham draws a distinction between two types of political man: The “ruler-type” who occupy positions of power or aspire to occupy such positions if presented the opportunity to do so; and the “ruled-type” that consist of the masses of the population, who neither lead nor are capable of leading ([1943] 2020: 47). 1

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political status quo be taken as given as a matter of scientific analysis, rather than suggesting that the status quo has any normative importance in the sense of either being “good” or “bad.” From this status quo, it becomes possible to understand how Pareto-improving rule changes from that status quo can take place as by-product of political entrepreneurship. Such a scientific analysis of political processes is consistent with a classical-liberal vision of society, one that is predicated on productive social cooperation under the division of labor as its organizing principle. In recent years, the political foundations of economic development have been framed in two ways. According to one theoretical approach, the use of violence can be a productive activity if it used as a means to define and enforce property rights, or it can unproductive if violence is used to engage in wealth transfers in the form of public predation or private predation (Lane 1958). From this perspective, the fundamental basis for securing and defining property rights, and hence economic development, is the minimization of the returns to violence in the first place. Hence, the analytical point of departure for understanding economic and political development becomes an inquiry into how and why a society escapes a “violence trap” (North et al. 2009; Cox et al. 2019). Such a framing of political processes in terms of organizing violence is not inconsistent with Burnham’s understanding of politics, inspired by Machiavelli, as “primarily the study of the struggles for power among men” (Burnham [1943] 2020: 37). According to another theoretical approach, known as state capacity theory, economic and political development is dependent upon the power of the state to raise revenue (see Tilly 1975), but more broadly refers to “the wider range of competencies that the state acquires in the development process, which includes the power to enforce contracts and support markets” (Besley and Persson 2010: 1; see also Johnson and Koyama 2014, 2017, 2019). “Just as private physical and human capital accumulation is a key engine of private sector growth”, Besley and Persson state further on the same page, “the buildup of public capital is also an engine of state expansion”, specifically an expansion in its effectiveness to raise revenue, not only for the provision of public goods, but also for enforcing of property rights and contractual exchange. Although not stated in terms of state capacity, Burnham’s analysis parallels the historical conclusions made according to state capacity theory about political and economic development in Western Europe. Prior to the fifteenth century, “state power of the cities, and their armed forces were not no strong enough to police transportation routes, guard the sea lanes, put down brigandage, and the vagaries of barons who did not realize that their world was ending. Uniform systems of taxation and stable, standardized money for large areas were now required. For all such tasks only the modern nation-state could adequately provide” (emphasis added; [1943] 2020: 33). There are two ways to reframe the analytic points from which each of these theoretical approaches are departing, both employed with greater analytical effect by Burnham. This is by treating them as conceptual parts of the same theoretical story. First, both the economics of violence and state capacity theory implicitly share a common denominator; implicitly, they are both inquiries about the necessity for societies to escape a transitional gains trap in order to realize the conditions of a

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market economy and constitutional democracy under the rule of law.2 The transitional gains trap, according to Gordon Tullock, refers to a process by which the creation of monopoly privilege creates a transitional gain in the form of an artificial rent for an initial holder of such privileges. However, competition for such privileges will create a situation in which the value of the rent will tend to be capitalized into the resale value of the privileges, such that subsequent owners are no better off than if the privilege had not been created in the first place. However, the removal of such privileges would result in a concentrated cost on the special interest group, the benefits of which are dispersed onto the masses of the population. This means that the transaction costs of collective action, associated with directly “buying out” current benefactors of the existing system may be too high relative to any potential gains to society (see Tollison and Wagner 1991). The transitional gains trap introduces a paradox in the following sense. If an institutional transition in the form of nation-state is a public good in the sense of controlling societal violence by monopolizing it, and state capacity is necessary for the capacity to deliver this public good, then each require a prior credible commitment to the rule of law, the prior creation of which is a public good itself. It is in this sense misleading to speak of a nation-­ state governing over a market economy, when in fact both the institutional conditions of well-functioning nation-states in the West and their corresponding market economies, governed by private property rights, are entangled, since, historically, they coevolved as byproducts within the same social process: an evolution toward the rule of law. Moreover, if the process of economic and political development is fundamentally one of institutional transition, particularly one of eliminating political and legal privileges that redirect entrepreneurship from unproductive to productive activities, then the counterintuitive policy implication for transitional political economy may be particularly frustrating for a classical liberal policy reformer. This is because attempts to change the rules of the game, and eliminate monopoly privileges through political discretion, will only incite rent seeking, generating greater dissipation of wealth than if the transfer had not been initiated. The key point here is that, since political discretion is the very source of monopoly privileges created by the state, political discretion cannot also be the source of its abolition. Political discretion used as an instrument to abolish legal privilege cannot occur without simultaneously creating another legal privilege, since political discretion, by its very nature, intends to benefit one party at the expense of another. Does this imply that the classical-liberal minded reformer should be left to “do nothing”? Quite the opposite. As Tollison and Wagner argue, “the most efficient instrument for ‘reforming’ existing monopolies is the competitive market process itself” (Tollison and Wagner 1991: 69, fn. 10). The counterintuitive implication here is that monopoly privileges are the very source of their own erosion, since barriers to entry intended to shield a special interest group unintendedly create the very profit opportunities to erode the

 For additional overlaps and potential complementarities for future research between public choice and state capacity theory, see Piano (2019). 2

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rents derived from such privileges. I will elaborate on the entangled nature of this process in the next section. Alternatively, another manner in which to reframe the economics of violence and state capacity theory is to situate them as starting points and end points of a particular process, respectively. That is, rather than regarding the nation-state as the prerequisite for modern economic growth, and therefore analytically antecedent to the market, both the state’s capacity to tax and finance the provision of public goods as well as a market economy co-evolved together as by-products of an evolution toward the rule of law. It is in this sense, from Burnham’s standpoint, that liberty is born out of a violent struggle for power ([1943] 2020: 63). “This seeming paradox,” Burnham states, “that the frank recognition of the function of violence in social conflicts may have as a consequence a reduction in the actual amount of violence, is a great mystery to all those whose approach to society is formalistic” ([1943] 2020: 117). Though preceding their later work on the economics of violence, nor stated in terms of state capacity, the account offered by Douglass North and Barry Weingast (1989) regarding the political and economic consequences of the Glorious Revolution illustrates what is incomplete about these literatures, treated separately, and how Burnham offers a way, however implicit, to treat them as a coherent whole. Following the Glorious Revolution of 1688, in which the Parliament of England deposed James II for his increasingly arbitrary behavior fiscal policy, “not only did the government become financially solvent, but it gained access to an unprecedented level of funds” (North and Weingast 1989: 805) by borrowing on the market at increasingly lower interest rates, reflecting a substantial increase in the state’s capacity to tax and finance for the provision of public goods. To be clear, the point here is not consistent with what might be referred to as a “neoliberal” narrative,3 since the policy implications of such a narrative would suggest that violence can be used as a means to deliberately impose market-oriented reforms exogenously and by design. Rather, the account by North and Weingast illustrates quite the opposite, that state capacity evolved unintendedly and endogenously as a by-product of a perceived commitment by the government to honor its agreements among investors. Such political constraints that emerged in England, in turn, were preceded and contingent, as Barzel (2002: 35) would argue, on the existence of a collective action mechanism with sufficient power to oppose the ruler in the first place (see also Barzel 2002: 115; Kiser and Barzel 1991). The puzzle, then, becomes, why would it ever be in the self-interest of a ruling political elite to allow a collective action mechanism, such as parliamentary body, as a check on its predatory power in the first place? From Burnham’s standpoint, such state-capacity is born out of a violent struggle for power between “ruler-types”, or political elites, requiring an entangled political economy approach to understand how society escaped a transitional grains trap.

 For an excellent engagement of the literature on “neoliberalism,” which disentangles the various misleading conflations of neoliberalism with classical liberalism, see Leeson and Harris (2023). 3

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 Constitutional Theory of Property Rights: Insights A from Entangled Political Economy “Only out of the continuing clash of opposing groups,” Burnham states, “can liberty flow” ([1943] 2020: 63). Given that scarcity implies competition, and that competition itself is a process of resolving conflicting ends, violence and the use of political power is just one form of competition to fulfill an individual’s ends, whether that includes greater wealth, social status, or security. For this reason, entangled political economy is a well-suited theoretical approach to understand how the institutional conditions that credibly constrain arbitrary discretion among political elites can evolve out of the threat of violence. “Entangled political economy,” according to Richard Wagner, “seeks only to achieve consilience between politics and economics by exploring some implications of the recognition that good commercial practice often requires political involvement just as good political practice often requires cultivation of commercial organizations” (2020: 8; see also Wagner 2014, 2016). The entangled political economy approach can trace its direct roots back to the work of Vilfredo Pareto, but also has antecedents in classical political economy. Joseph Schumpeter has argued about Pareto that “primarily and fundamentally his sociology was a sociology of the political process” (Schumpeter 1949: 168). This would seem to suggest that Pareto’s economics and his broader social theory are separate rather than overlapping parts of a broader theory of human action. However, as he points out, in “political economy itself, theories of pure or mathematical economics have to be supplemented – not replaced – by the theories of applied economics” (Pareto [1916] 1963: 20). This “logico-experimental” method of social science, according to Pareto, applied not only to his understanding of economics but also applied no less to the other social sciences, particularly political science. The logico-experimental method, according to Pareto, traces the unintended consequences of social interaction under alternative institutional arrangements (i.e., the realm of applied theory) back to the choices of individuals, who are attempting to fulfill their separate ends through the purposive applications of means to such ends (i.e., the realm of pure theory). Though Pareto distinguishes between logical action and non-logical action, the distinction is not between rational action and irrational action. Rather, the terms describe the pure form of human action, the substance of which is manifested under different institutional contexts. Whereas logical action manifests itself in the realm of markets within a context of private property and price signals, non-logical action manifests itself in the realm of politics, which is outside the context of market exchange and price signals. Thus, the outcomes in Pareto’s general theory of human action, or sociology as he refers to it, is not based upon an aggregation of atomistic individuals, maximizing given means to given ends in isolation. This would be the case if Pareto collapsed his understanding of “pure economics,” or what Hayek refers to as the “pure logic of choice,” onto the outcomes of social interaction. Yet no one-to-one relationship between rational action and outcomes exists in Pareto’s sociology. The link between the two is indirect, yet bridged by an institutional analysis of time and circumstance. Therefore, to

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conclude that Pareto’s general theory of human action was based upon the “perfection” of Walrasian general equilibrium only characterizes his understanding of pure theory and cannot be superimposed upon his broader understanding of political economy. Burnham suggests that Pareto “defended, for some while, the point of view of orthodox ‘liberal’ economics – not what is nowadays called ‘liberalism,’ that strange mélange of sentimental confusion, but the classical liberalism of free trade and free markets. This point of view he gradually abandoned” (Burnham [1943] 2020: 155–156). This may be the case because Pareto’s alleged association with fascism was implied by his increasing interest in force. However, from a Paretian perspective, force is another set of means to compete for scarce resources that can be traced back to logical action. If Pareto’s classical liberalism was inconsistent, it is only because it was “imperfect” in the sense of his failure to complete his positive analysis of human interaction by carrying it to its logical conclusion, which was to modify the political rules of the game in a way that minimizes the gains from rent-seeking. Such an interpretation of Pareto lends itself to an inherent puzzle in Burnham, in which he states the following: Two opposing tendencies always operate in the case of every élite: (a) an aristocratic tendency whereby the élite seeks to preserve the ruling position of its members and their descendants, and to prevent others from entering its ranks; (b) a democratic tendency whereby new elements force their way into the élite from below. ([1943] 2020: 205–206)

And Burnham continues: In the long run, the second of these tendencies always prevails. From this it follows that no social structure is permanent and no static utopia is possible. The social or class struggle always continues, and its record is history. ([1943] 2020: 206)

How can Pareto’s theory of social interaction resolve this puzzle? According to Pareto, the character of any society rests in the character of its elite; the accomplishments of a particular society “are the accomplishments of its élite...successful predictions about its future are based upon evidence drawn from the study of the composition and structure of its élite. Pareto’s conclusions here are the same as those reached by Mosca in his analysis of the narrower but similar concept of the ‘ruling class’” ([1943] 2020: 188). Thus, from Burnham’s standpoint, the gradual tendency towards democracy and free markets under the rule of law is not a function of abolishing elites, but redirecting the entrepreneurial talent of the political elite away from rent-seeking behavior and toward profit-seeking behavior (see Buchanan 1980). The key to understanding this redirection in entrepreneurial activity can be understood through the lens of property rights. According to Harold Demsetz, individuals will devise private property rights arrangements in response to changes in the transaction costs of internalizing an externality. As Demsetz puts it (1967, p. 350), “property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization.” His example of the emergence of property rights, due to the rise of the fur trade throughout the eighteenth century among the Montagnes inhabiting regions around Quebec, illustrates this

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previous point. Prior to the rise of the fur trade, hunting only took place primarily for the purposes of food, the significance of which, in terms of externalities, was small enough that it did not pay for anyone to take account of them. With the rise of the fur trade, the lack of private property over beavers led to overhunting in the sense that no individual finds it in their self-interest to take full account of the costs imposed on subsequent hunters, resulting in a negative externality. The advent of the fur trade led to an increase in the relative price of furs as well as hunting activity, both of which incentivized the emergence of property rights to internalize the externality of hunting. This resulted from the expected gains of internalization exceeding the expected transaction costs of devising and enforcing property rights arrangements over beaver pelts. The theoretical argument and historical illustration provides a straightforward and powerful lesson of how property rights replace potential competition for resources in the form of violent conflict for peaceful competition for resources in the form of productive specialization and voluntary exchange. I say the word “potential” for a very specific reason, since the example in this paper provides yet another puzzle, one that I’m paraphrasing from Professor Richard Wagner’s fantastic book, Mind, Society, and Human Action (2010: 41–42): why are not the Native Americans in this historical example not incentivized to fight when furs become more valuable? Or, to put it another way, what are the institutional arrangements precluding the Native Americans from fighting between each other, or for that matter, between the Native Americans and Europeans who would later colonize the area for such resources? These questions are not meant in anyway to undermine the theoretical validity of Demsetz’s argument. Rather, what I’m suggesting here is that the outcome illustrated in Demsetz’s example is predicated on an implicit assumption, namely there exists a set of institutional preconditions that internalize another negative externality, namely the costs of violent conflict itself (such costs being the foregone opportunity to engage in productive specialization and exchange). Understood this way, the emergence of property rights in Demsetz’s example is contingent on a set of rules that internalize the cost of using violence, or put another way, minimize the returns to using violence, as a means to define and allocate property rights. What all this implies is that Demsetz’s story can be incorporated into framework of constitutional political economy, developed by James Buchanan and Gordon Tullock (1962) as well as F.A.  Hayek (1960), one that redirects attention to a rule-level of analysis, which govern the emergence of property rights as by-product of interaction within a set of rules. As Hayek best states this point in The Constitution of Liberty (1960: 151): “from the delimitation of a private sphere by rules, a right like that of property will emerge.” Hence, in order to understand Burnham’s thesis about the tendency towards democratization and liberty, a constitutional theory of rules governing the formation of property rights is necessary for understanding how the transitional gains trap was overcome in the West. The underlying basis for this institutional evolution beginning in Medieval Europe begins with modelling an autocratic ruler and what Pareto refers to as “governing élites” and “non-governing élites.” The governing elites are constituted by

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the barons and landed aristocracy, and the non-governing elites are rivaling for political power, constituted by the burghers and merchants. As political entrepreneurs, these individuals are adjudicating a trade-off between their own personal security and personal wealth. In a world or zero transaction costs, a ruler could confiscate the entire value of their subjects’ wealth. This unrealistic scenario neglects two facts. First, predation leads to rent dissipation as the ruler must expend time and resources to capture such transfers of wealth and avert potential rebellion from his or her subjects. Secondly, such activity also stifles the conditions for economic calculation, productive specialization and exchange, and hence wealth creation, which is required for the acquisition of resources necessary for an autocrat’s defense from foreign aggression in the first place. This assumes that an autocrat is a residual claimant, which is consistent with the fact that under feudalism the distinction between political rights and economic rights was blurred, and economic wealth was derived from political jurisdiction over land, from which feudal lords earned their income. To the extent that a ruler is secure in his or her power, he or she is willing to trade off some personal security by allowing his or her subjects to accumulate wealth through productive specialization and exchange. This implies, however, a credible commitment on the part of the ruler to enforce property rights, and not confiscate wealth. Assuming also the absence of third-party enforcement or any precedent to establish such a credible commitment, a secure ruler can establish this by providing the means through which to constrain himself via independent collective action from their subjects. This manifested itself in Western Europe in the Middle Ages in the formation of early parliaments, which were not democratic institutions as understood today. Rather, such forerunners to modern democratic institutions provided political elites voting rights over revenues required for defense and other “public goods” in exchange for the enforcement of their property rights over their respective manors (see Congleton 2011; Salter 2015). Though such voting rights initially manifested itself as political privileges initially exclusive to an aristocratic elite, a credible commitment to constraints on predation cannot be excluded from nonelites residing in a jurisdiction, manifesting itself as a public good, or a positive externality, from which nonelites may accumulate wealth. However, the very basis for such “free-riding” presented a political profit opportunity for monarchies to centralize their authority, namely by further extending political enfranchisement to the bourgeois with voting rights in parliaments, in exchange for tax revenue. Thus, the accumulation of wealth among the burghers, merchants, and other bourgeois became “internalized” by monarchs in Western Europe, and unintendedly generated the conditions consistent with the emergence not only of the state and “national defense,” but also the coevolution of liberal democracy and economic development. As Burnham elaborates on this political process:

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All of the European nations were consolidated through a Prince – rather, a succession of Princes4 – and it is hard to see how it could have been otherwise. So it was in France, so in England, so in Spain. The feudal lords did not want nation-states, which in the end were sure to bring the destruction of their power and privileges. The masses were too inarticulate, too ignorant, too weak, to function as a leading political force. The Church knew that its international overlordship was gravely threatened if the national system were successful. The one great social group that required the national system was the new and spreading class of the burghers, the business men, the merchants, the early capitalists. This class, however, was too young, too untried, too unused to rule, to take on the job by itself. But the monarchy also—the King and those immediately associated with the King—was ready for the nation, through which the full political sovereignty of the monarch could be centralized and brought to bear against the centrifugal pull of feudalism. Therefore a de facto alliance was made, and around the monarchy the nation was pulled together. (emphasis original; Burnham [1943] 2020: 34)

Moreover, Rosenberg and Birdzell (1986: 101) elaborate on this process as follows: “economic growth was a force for democratization and eventually produced a society unmanageable by the old landed elite and their political devices.” Our point here is neither to justify the emergence of the state, nor to claim that the state’s capacity to deliver public goods was historically necessary to deliver the conditions necessary for economic development. However tempting it may be, analytically speaking, to take the nation-state as analytically primary, such an analytic point of departure is misleading for two reasons. First, it proceeds on the assumption that there is a strict dichotomy between the market and the state, and secondly, that the state analytically precedes the existence of markets in the provision of public goods. Rather, by reframing public goods theory through a process paradigm, rather than a comparative static paradigm, what I’m suggesting here is that the emergence of the state, with the capacity to provide public goods, is itself a public goods problem, a problem that transcends the traditional dichotomy between the notion of a state intervening to correct a “market failure” or the notion of a “government failure” to enforce given property rights. Since the historical illustration presented here implies that questions of economic development cannot take either the state or markets as given, then, as suggested by Furton and Martin (2019), the fundamental problem of economic and political transition is one of “institutional mismatch,” or a situation in which a feasible set of rule changes are possible over a prevailing set of rules. Thus, a perceived mismatch presents a profit opportunity for a political entrepreneur, one in which institutions become more aligned to match the goals of Pareto’s “governing élites” and “non-governing élites” via political exchange to constitutionally condition the terms and conditions of coercion. Thus, the non-rivalrous and non-­ excludable nature of the outcome associated with the emergence of “public goods,” whether couched in terms of state capacity or otherwise, cannot be understood  Also of crucial importance for this unintended political process was political fragmentation in Europe, which created the conditions for interjurisdictional competition. Rosenberg and Birdzell argue that in the West, “individual centers of competing political power had a great deal to gain from introducing technological changes that promised commercial or industrial advantage and, hence, greater government revenues, and much to lose from allowing others to introduce them first” (1986: 137). 4

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without rivalry in the production and consumption of public goods in the first place, and that such rivalry may include the threat of violence. Thus, the historical emergence of the state and other public goods cannot be disentangled from each other, as they have been part of the same evolutionary process.

Conclusion and Implications “If men generally understood as much of the mechanism of rule and privilege as Machiavelli understood,” Burnham argues, “they would no longer be deceived into accepting that rule and privilege, and they would know what steps to take to overcome them” ([1943] 2020: 70). From Burnham’s standpoint, public choice should not be perceived as a justification for despair and cynicism, but an analytical point of departure for hope in the faith that institutional constraints can be subject to reflection and choice, and not always accident and force. Moreover, if we understand the entangled nature of social processes from which constitutional democracy and a market economy have emerged, then we can become better informed about the pitfalls of attempting to eliminate what are inherent characteristics to such social processes. That is, if (1) competition is ubiquitious to all human interaction, (2) violence is a form of competitive behavior, and (3) all societies consist of elites that are competing for power, then the question for political economy is not how to abolish violent competition between elites. Rather, the question becomes how to channel the threat of violence into a means by which competition between political elites evolves into positive-sum processes rather than negative processes. From an entangled political economy standpoint, this is ultimately where the answer to the inquiry into the nature and causes of the wealth of nations resides.

References Barzel, Yoram. 2002. A Theory of the State: Economic Rights, Legal Rights, and the Scope of the State. New York: Cambridge University Press. Besley, Timothy, and Torsten Persson. 2010. State Capacity, Conflict, and Development. Econometrica 78 (1): 1–34. Brennan, Geoffrey, and James Buchanan. 1981. The Normative Purpose of Economic ‘Science’: Rediscovery of an Eighteenth Century Method. International Review of Law and Economics 1 (2): 155–166. Buchanan, James M. 1975. The Limits of Liberty: Between Anarchy and Leviathan. Chicago: University of Chicago Press. ———. 1980. Rent Seeking and Profit Seeking. In Toward a Theory of the Rent-Seeking Society, ed. James M. Buchanan, Robert D. Tollison, and Gordon Tullock, 3–15. College Station: Texas A&M University Press. Buchanan, James M., and Gordon Tullock. 1962. The Calculus of Consent: Logical Foundations for Constitutional Democracy. Ann Arbor: University of Michigan Press. Burnham, James. [1943] 2020. The Machiavellians: Defenders of Freedom. Borough: Lume Books.

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Congleton, Roger D. 2011. Perfecting Parliament: Constitutional Reform, Liberalism, and the Rise of Western Democracy. New York: Cambridge University Press. Cox, Gary W., Douglass C. North, and Barry R. Weingast. 2019. The Violence Trap: A Political-­ Economic Approach to the Problems of Development. Journal of Public Finance and Public Choice 34 (1): 3–19. Demsetz, Harold. 1967. Toward a Theory of Property Rights. The American Economic Review 57 (2): 347–359. Furton, Glenn, and Adam Martin. 2019. Beyond Market Failure and Government Failure. Public Choice 178 (1–2): 197–216. Hayek, F.A. 1960. The Constitution of Liberty. Chicago: University of Chicago Press. Johnson, Noel D., and Mark Koyama. 2014. Tax Farming and the Origins of State Capacity in England and France. Explorations in Economic History 51 (1): 1–20. ———. 2017. States and Economic Growth: Capacity and Constraints. Explorations in Economic History 64 (2): 1–20. ———. 2019. Persecution & Toleration: The Long Road to Religious Freedom. New  York: Cambridge University Press. Kiser, Edgar, and Yoram Barzel. 1991. The Origins of Democracy in England. Rationality and Society 3 (4): 396–422. Lane, Frederic C. 1958. Economic Consequences of Organized Violence. The Journal of Economic History 18 (4): 401–417. Leeson, Peter T., and Colin Harris. 2023. Hayek, Neoliberalism, and the Washington Consensus. In A Companion to F.A. Hayek, ed. Rosolino A. Candela. Guatemala City: Universidad Francisco Marroquín. North, Douglass C., and Barry R. Weingast. 1989. Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England. The Journal of Economic History 49 (4): 803–832. North, Douglass C., John J. Wallis, and Barry R. Weingast. 2009. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. New York: Cambridge University Press. Pareto, Vilfredo. [1916] 1963. The Mind and Society: A Treatise on General Sociology. New York: Dover Publications. Piano, Ennio E. 2019. State Capacity and Public Choice: A Critical Survey. Public Choice 178 (1–2): 289–309. Rosenberg, Nathan, and L.E.  Birdzell Jr. 1986. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books. Salter, Alexander W. 2015. Rights to the Realm: Reconsidering Western Political Development. American Political Science Review 109 (4): 725–734. Salvatore, Dominick. 2003. Microeconomics: Theory and Applications. 4th ed. New York: Oxford University Press. Schumpeter, Joseph. 1949. Vilfredo Pareto (1846–1923). The Quarterly Journal of Economics 52 (2): 147–173. Tilly, Charles, ed. 1975. The Formation of National States in Western Europe. Princeton: Princeton University Press. Tollison, Robert D., and Richard E.  Wagner. 1991. Romance, Realism, and Economic Reform. Kyklos 44 (1): 57–70. Tullock, Gordon. 1975. The Transitional Gains Trap. The Bell Journal of Economics 6 (2): 671–678. Wagner, Richard E. 1966. Pressure Groups and Political Entrepreneurs: A Review Article. Papers on Non-market Decision Making 1: 161–170. ———. 2010. Mind, Society, and Human Action: Time and Knowledge in a Theory of Social Economy. New York: Routledge. ———. 2014. Richard Epstein’s The Classical Liberal Constitution: A Public Choice Refraction. New York University Journal of Law & Liberty 8 (3): 961–990.

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———. 2016. Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy. Cheltenham: Edward Elgar. ———. 2020. Entangled Political Economy: Mixing Something Old with Something New. GMU Working Paper in Economics No. 20–33. Available at SSRN: https://ssrn.com/abstract=3682168 or https://doi.org/10.2139/ssrn.3682168.

From Entangled Political Economy to Civil Association: A Difficult Journey Laurent Dobuzinskis

The purpose of this chapter is not to refute but to qualify the lesson that can be drawn from James Burnham’s (1943) The Machiavellians and to outline what I argue is a more prudent and justifiable approach to restoring the primacy of classical liberal principles than invoking Carl Schmitt’s hypothesis of a “state of exception” (Wagner 2016, 96; 2020, 294–296). I hasten to add that when Richard E. Wagner alludes to Schmitt’s concept, he is using it for descriptive or analytical purposes, and not as a preferred option for resolving current disfunctions. (It can, however, be meaningful in both a descriptive and normative sense to analyze emergencies affecting specific communities, such as the disaster caused by hurricane Katrina in New Orleans [Sterpan and Wagner 2017, 10]). By the same token, however, the use of this concept makes power politics more salient. My justification for turning to Michael Oakeshott’s political theory is that the latter foregrounds the notion of legitimacy.1 Of course, the distinction between raw power and legitimate power does not always hold in practice but it nevertheless is a significant normative idea. This loosely speaking Aristotelian search for a pragmatic approach originates in a reflection on the reasons for adopting “enlightened” self-interest instead of pure self-interest as a key to understanding political economy. While high-minded altruism is too exceptional to serve as a foundation for political economy, and the pursuit of utopian ideals too often masks more contingent concerns, I suggest that our individual “selves” are complex. The “self” cannot be completely hived off  Noël O’Sullivan (2014) argues that Oakeshott has exaggerated the severity of the crisis of legitimacy. But my reason for turning to Oakeshott is not that I fully agree with his diagnosis but rather that he aptly foregrounds the concept of legitimacy. 1

L. Dobuzinskis (*) Department of Political Science, Simon Fraser University, Burnaby, BC, Canada e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_6

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from its social context. Moreover, all individuals are “interested” in fairness—an observation that is grounded in both empirical psychology and our everyday experience of social interactions. The core idea here is that one’s interest is tied to one’s reputation and standing in the intersecting communities to which one belongs. This serves as a foundation for a “politics of moderation,” as defended by Aurelian Craiutu (2017) in recent years, but which can be traced back to the likes of Montesquieu, Voltaire, Hume, Smith, Constant, or Guizot (Rasmussen 2013; Haan and Lok 2019). From that angle, it is possible to rethink the meaning of rationality and the role played by “sentiments” in human affairs in ways that differ from what the Italian elitist theorists theorized (Machiavelli is a more complex case because his commitment to civic virtue was far more apparent in his Discourses than in The Prince). It also follows that my arguments offer a friendly critique of the assumptions upon which Public Choice rests, albeit not necessarily of all its practical conclusions. Now if the problem at hand is what are the best (most realistic) means of rescuing classical liberalism from the “convulsions of democracy,” then I suggest that (1) a politics of moderation informed by a scepticism toward rationalism, and (2) close attention to the legitimacy of both the means and the ends of any collective action aimed at disentangling an entangled political economy are the most promising avenues for answering that question. Both recommendations are loosely inspired by the central tenets of Michael Oakeshott’s political theory (1975, 1991). This chapter is organized around two key ideas: the limits of rationalism and the proper usage of moral “sentiments”; the latter, in turn, is developed by pursuing two themes: the rediscovery of virtue ethics in politics, as a means to control rent-seeking, and the psycho-social appeal of fair reciprocity as a way of legitimizing a gradual shift from the politics of redistribution to the politics of predistribution. In the next section, I raise questions about the extent to which Burnham’s Machiavellians—and Pareto in particular—implicitly refer to an idealized understanding of rationality in their analysis of the convulsions of democracy. The implication of this prejudice is a temptation to plan the elimination of planning! In section “Using “Moral Sentiments” to Control Ren-Seeking Behaviors”, I propose using virtue ethics—the sentiment of self-respect and its role in reinforcing a reputation for integrity—combined with institutional reforms promoting publicness as means to control rent-seeking behaviours. Section “Legitimizing the Trimming of an Entangled Political Economy Building Upon Expectations of Reciprocal Fair Treatment” sketches out the sort of political economy toward which a gradual and prudent rebalancing of what Oakeshott calls “enterprise associations” (teleological organizations, including the interventionist state) and “civil association” (i.e., the classically liberal preference for open-ended and decentralized modes of cooperation) might look like. More specifically, I argue that a possible path toward that end involves a trimming of redistributive programs and their restructuring as predistributive arrangements enhancing the freedom of disadvantaged individuals to play a more active role in markets and civil society.

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 eason Properly Understood Does Not Equate R with Rationalism Although less plainly in Machiavelli’s own writings, Burnham’s “Machiavellians” generally disparaged “sentiments.” Their attitude toward rationality appears to be more ambiguous, While arguing that politics is typically not rational—a-rational at best and occasionally irrational—this negative perception more or less implicitly entails an idealization of rationality as something that ought to be restored, either by reforming politics, or by rebalancing institutions in favour of markets, or both, Moreover, Pareto’s grandiose theory of society—the sociological equivalent of contemporary physics’ elusive “theory of everything”—could be read as the key that unlocks the mysteries of politics, A determined elite group could conceivably use it to effect purportedly beneficial changes. Whether Pareto intended his theory to be used in this manner is not evident and, in any event, the theory itself suggests that even if a clearsighted elite could accomplish this feat, it would be transitory in the long run. But there is an indisputable engineering undertone in Pareto’s sociological analysis: successful elites are supposed to excel at manipulating the “derivations” that can be inferred from popular myths and beliefs; they are the skilled architects of their own, self-serving mastery of power. And, as I suggested, Pareto’s theory could itself become instrumental in reforming a corrupt democratic system. Now these remarks need to be elaborated upon, although space lacks here to engage in a through discussion of the Italian elitist tradition. Machiavelli’s notion of fortuna, the constant threat posed to established order by unpredictable events, serves as a warning against complacency on he part of even successful rulers. But, to use contemporary language, he also urged rulers to plan ahead: But although rivers are like this, it does not mean that we cannot take precautions with dikes and dams when the weather is calm, so that when they rise up again either the waters will be channelled off or their force will be neither so damaging nor so out of control. The same things occur where Fortune is concerned. She shows her power where there is no wellordered virtue to resist her, and therefore turns her impetus towards where she knows no dikes and dams have been constructed to hold her in. If you consider Italy, the seat of these upheavals and the area which has set them in motion, you will see a countryside without dikes and without a single dam: if Italy had been protected with proper virtue, as is the case in Germany, Spain, and France, either this flood would not have produced the enormous upheavals that it has, or it would not have struck here at all (Machiavelli 2005, 92–93).

Although Machiavelli warned that fortuna can still prove to be stronger than prudent rulers, the advice he attempted to give to the Medici dynasty emphasized strategic thinking of the sort that can be best described as instrumental rationality on steroid.2 As for the other Machiavellians, and Pareto in particular, the connection between their analyses of the power of ruling elites and rationalism is more  I do concede that Machiavelli also acknowledged that the best strategists sometimes fail if, like Cesare Borgia, they fall victims to self-delusion. Moreover, one must keep in mind that Machiavelli’s preferred regime was a civic republican one modeled on the Roman republic, as he made clear in his Discourses on Livy. 2

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complicated and needs to be carefully examined. There is no question that Pareto regarded politics as being fundamentally incompatible with the detached application of rational ethical principles, such as those enounced by Immanuel Kant, or the object of a practical science of governance such as Plato’s philosopher-kings supposedly possessed. To begin with, the determinant factors in politics are best approached through the lenses of social psychology. The non-governing groups think about political matters in terms of various myths and dispersed beliefs that Pareto calls “residues.” The “residues” are not strictly speaking irrational, but they are constituting elements of “non-logical conduct”; Pareto (The Mind and Society vol. 2, §270) writes: “Residues correspond to certain instincts in human beings, and for that reason they are usually wanting in definiteness, in exact delimitation.” He further remarks that “The residues are the manifestations of sentiments and instincts just as the rising of the mercury in a thermometer is a manifestation of the rise in temperature” (§875). But the term “instinct” is not very helpful here; perhaps we can think of residues as the flotsam of historical experiences and cultural values, often also combined with vague perceptions of one’s material interests. But from residues seemingly more logical “derivations” are formed which appear to justify the underlying beliefs and can be used to articulate explicit political demands or injunctions.. This is how political elites manipulate the public for their own ends, although occasionally they may actually help a majority of citizens to achieve their own ends, albeit always at the expense of some other groups. But since majorities are fickle, the elite will themselves change and be replaced by other ones, even if their general characteristics are more stable. One thing is striking about Pareto’s political sociology is its positivist epistemology. He definitely thought of what he was doing as a clinical assessment of the dysfunctions of majoritarian democracy and the incapacity of ruling elites (at least prior to the arrival of the fascists on the scene) to remedy these dysfunctions. Politics is a non-logical domain, but it can be explained in causal terms even if, admittedly, Pareto’s sociology is far less rigorous than his economic writings. So, while he did not think that the ruling elites, which in any event he never presented as a coherent group capable of acting in unison, were factually capable of acting truly rationally, he might have harboured the hope that one day some group could. The unacknowledged implication of his colossal effort to scientifically analyze the totality of the processes that produce political order is that these processes can be grasped by those who care to make the effort of doing so. Once the exact causes of the dysfunctions of society have been laid bare, then perhaps (albeit not with a high degree of likelihood) a new, more competent leadership could eradicate the source of these dysfunction. In that sense, his approach was at least potentially rationalist in spite of his pessimistic scepticism. My tentative reframing of the Italian tradition in rationalist term may be open to questions but it is, on the whole, defensible. The question of whether the same can be said of Carl Schmitt’s political theory as a whole is more delicate. Certainly, his entire vision which is “theological” (Schmitt 2005) in some respects and in which myths often take center stage cannot a priori be characterized as being rationalist (Tregenza 2002; Tralau 2010). But then again, I am not concerned here with

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Schmitt’s entire body of work. I merely suggest that his defence of the concept of “the state of exception” as the means of restoring order by by-passing ordinary constitutional provisions is grounded in an instrumentally rationalist interpretation of the role of the sate. (Whether the ultimate goal itself is substantively rational is far less clear: According to Renato Cristi [1998] it was to re-establish a classically liberal order but Cristi’s interpretation is arguably idiosyncratic and there are reasons to believe that Schmitt had in mind something more sinister.) I want to challenge the pretense that elites could—at least plausibly—formulate a “plan” to correct the most extreme ills of an entangled political economy.3 My motivation here is not to challenge the desirability of addressing these ills but rather the approach, the proposed method. Not that I want to challenge the need to be “realist” about the constraints imposed by the logic of power on would-be reformers, nor to deny that politics cannot be reduced to ethics and the more benign logic of voluntary market exchanges because, pace libertarians, these exchanges are nor sustainable in the absence of political institutions that can guarantee their integrity. But I am more sceptical of the feasibility of pursuing a clearly defined plan—any plan—and of the certainty that would-be rescuers of classical liberalism can have about the urgency of swiftly changing course. And I tend to think that the best source for rescuing democracy is still to be found in the democratic tradition itself, or at least in some currents within I and more particularly civic republicanism. The best source for building a case against rationalist planning is arguable Michael Oakeshott’s political theory. I write “arguably” because, of course, we owe to F.A. Hayek a devastating critique of planning. But while Hayek’s epistemological argument about the lack of knowledge at the disposal of the planners is indeed powerful and convincing, it misses a political dimension which is more evident in Oakeshott’s works. A parallel that can be drawn between Pareto and Wagner is that they have explained how democratic regimes have been transformed into complex systems in which markets and state institutions are meshed or “entangled” in very problematic ways. These development pose a threat to property rights. Political moves rhetorically justified as serving the common good, such as policies intended to correct “market failures,” end up benefitting the elites that promote them. The solution

 As Wagner (2016, 2019) insists, an entangled political economy is very complex, and this justifies using systems theory as a theoretical framework for analyzing its functioning. But as I read him, he falls on the side of theorists such as Pareto or Wilhelm Röpke who have argued that entanglement or complexity is often more of a curse than a blessing. As much as feasible—and they acknowledge is often not feasible, these theorists advocate simplifying societal systems to create more space for individual initiatives at the local level. (While they advocate a return to simpler social relationships at the local level, they understand that the integration and coordination of all these communities can still be immensely complex.) Other theorists, such as Isaiah Berlin or Karl Popper tend to be more sanguine about complexity insofar as they see much virtue in pluralism and the interplay of ideas and the civil society organizations that defend them; for this reason, they are more prone to advocating what Popper called prudent “piecemeal engineering” than a deliberate push toward, if not the unfeasible eradication of complexity, at least a profound change in its quality. 3

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more or less vaguely insinuated by Pareto was the process of elite circulation could eventually bring to power clear-sighted political leader who would clean the Augean stables. (Schmitt was more forthcoming on this point.) Wagner’s position is more subtle and, in fact, rather difficult to summarize insofar as it is hinted at in various passages rather than categorically asserted. The jest of it seems to me to be that an entangles political economy is a very complex system which, in its current form, as a result of “regime drift” (Wagner 2006), is characterized by an imbalance in favour of the nodes occupied by state agencies, The issue then becomes how to re-balance the entangles political economy so that it can become more genuinely polycentric and in which privately owned and operated entities interact with largely decentralized public authorities in ways that would be more consistent with the principles of classical liberalism. The path toward that goal involves institutional reforms in the spirit of Buchanan’s constitutional politics together with the empowerment of political interests rooted in local communities that could keep the central government in check (Wagner 1993). All the same, I would suggest that the overall premise of the modern Machiavellians consists of posing a scientific diagnosis of what ails democratic regimes and to suggest,  in a  more or less detailed or tentative, if not elusive manner, a way out of the predicament. I contrast this approach with Oakeshott’s understanding of political complexity which he conveyed through the following metaphor: In political activity … men sail a boundless and bottomless sea; there is neither harbour for shelter nor floor for anchorage, neither starting-place nor appointed destination. The enterprise is to keep afloat on an even keel; the sea is both friend and enemy, and the seamanship consists in using the resources of a traditional manner of behaviour in order to make a friend of every hostile occasion. (Oakeshott 1991, 60)

Oakeshott (19914) faults the modern tendency to start from a tabula rasa, thereby ignoring the teaching of tradition and the fact that the social fabric is not as malleable as the rationalist reformers assume. They are unable to fully appreciate the complexity of the circumstances in which they find themselves and, therefore, their plans go awry, as s the poet said of “the best-laid plans of mice and men.” For Oakeshott, political is essentially about practice, not technique. Just as culinary recipes are not enough to cook at the level of master chefs, able political leaders rely on their own experience and an ability to be prudently guided by traditional norms of appropriate conduct. By “able” I mean here leaders who do the least harm to the common good. Two remarks are a propos here, however. First, what the common good mans in today’s highly pluralistic western societies is far from evident. So even the task of simply keeping an even keel for the ship of state has become more challenging than ever. And it goes without saying that turning it around toward a supposedly more desirable destination even more challenging when the prospect for forging a reasonable consensus on which structural changes are to be pursued. This is another way of saying that Oakeshott’s waxing about the importance of holding

 The essay “Rationalism in Politics which is reproduced in the cited volume was originally written in 1947. 4

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on to a vaguely Burkean tradition cannot mean the same thing today as it did in 1947. There might have been reasons then to resist a hurried implementation of the welfare state. But the indispensability of a state apparatus for ensuring the protection of citizens against unemployment, poverty, catastrophic illnesses, and so on, as well as maintaining and enhancing physical infrastructures, including the electrical grid on which our lives have become increasingly dependent, is the new fount of traditional values. Indeed, this is what entangled political economy means. But if so the prudent, non-rationalist approach is one of “trimming” (Craiutu 2017, chapter 5), a term I use repeatedly in this essay. I do not refrain further down from sketching out the shape of a “trimmed” political economy could look like. But if we wish to avoid disappointments or unexpected outcomes, (a) it seems reasonable to follow Oakeshott’s admonition against excessive haste or dogmatism, and to follow instead Karl Popper’s method of “piecemeal engineering”5; and (b) to remain alert to the possibility that the goal itself might have to be re-thought along the way if it turns out to be unworkable. A related facet of Oakeshott’s politics of moderation is his attention to the process of legitimizing the exercise of political power. It is important to remember that power alone—brute force—is paradoxically a rather ineffective means of governing. The illegitimate use of power undermines the authority of the Sovereign, as Hobbes himself (who is often Oakeshott’s source of inspiration) insisted upon. According to Oakeshott’s analysis, the ultimate source of legitimacy in non-­ authoritarian, (more or less classically) liberal regimes is the notion of “civil association,” and its corollary, “civility.” This concept does a lot of work for Oakeshott: it reconciles the moral autonomy of individual citizens with their participation in a collective process of establishing and maintaining rules of cooperation. As he puts it, the language of civil intercourse is a language of rules; civitas is a rule-articulated association. The recognition of rules is one of our most familiar experiences. We do not always have clearly before us the features in terms of which we distinguish and identify rules, but for the most part we deal confidently with the puzzles this experience throws up. We have no difficulty, for example, in distinguishing a rule from a piece of advice, a request, a plea, or a warning. These are all argumentative and persuasive utterances. They arise in particular situations. and they are tied to the occasion; they are transactions in which ascertainable agents seek the satisfaction of their wants and others respond in actions or utterances of their own. Advice, warning, etc. may refer to rules, and they may be governed by rules, but they are not themselves’ ‘the enunciation of rule. Similarly, rule are confidently distinguished from orders, command, behests, injunctions, directives, or mere prohibition. ([1975] 2003, 124)

Over time, however, this latter set of methods of coordination (i.e., orders, commands, injunctions, etc.) have come to play an increasingly important role. They are central to the functioning of what Oakeshott calls enterprise associations,” among which we can include state bureaucracies. (The parallel with Hayek’s [1971] distinction between “cosmos” and “taxis” is hard to escape.) This is another way of

 Karl Popper elaborated at length on this notion in his The Poverty of Historicism (1957).

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expressing the idea behind the development of an entangled political economy, although Oakeshott pays relatively little attention specifically to rent-seeking and remains more allusive about how or why enterprise associations have come to dominate the scene. Assuming that the imbalance between enterprise associations and civil association cannot be neither swiftly nor radically altered, the question now becomes how—through which means—should this “trimming” be accomplished. This is the task to which I turn in the next section. In the subsequent section, I address the question of what this trimming is meant to accomplish, that is to say, what sort of institutional reforms could be gradually deployed to enhance the autonomy of citizens within a more “civil economy,” a concept I borrow from the eponymous Italian school of political economy which I would suggest is not too far from Oakeshott’s political reflections on civility, although I am not aware of any other attempt in the philosophical or economic literature to explore this parallel.

Using “Moral Sentiments” to Control Rent-Seeking Behaviors In the previous section I took issue with the Machiavellians’ faith in rational thinking; in this and the next section, I argue that their negative assessment of the role of “sentiments” in politics needs to be nuanced. The appeal to idealistic sentiments about the greater good of humankind is at best naïve and, as Burnham showed in Dante’s case, a cynical pretext for advancing far less noble goals. This does not mean, however, that sentiments are irrelevant to the articulation a reasonable political economy. The thinkers of the Scottish Enlightenment, as well as some of their French contemporaries (not all of which should be tarred with the label of dogmatic rationalists), such as in particular the Abbé de Condillac, often used the concept of self-love to mean enlightened self-interest: the desire to love the better, virtuous, self that one seeks to impress on others. This is the mechanism at work in establishing a good reputation, in being esteemed by one’s peers and more generally, in the moral doctrine of virtue ethics which builds on such sentiments. Virtue ethics originated in Ancient Greece. Aristotle, for instance, claimed that the aim or telos of the citizens of a well-governed city state ought to be to achieve the sort of happiness that one enjoys by being regarded as a person of good character who devotes his life6 to the service of the city. This conception of virtuous citizenship is too onerous for our contemporaries, although there is much to be said about educating the members of public organizations about their ethical obligations.7 But we owe to Smith a remarkably persuasive adaptation of the paradigm to  Women could not be citizens in Greek cities so there is no need here to use a more inclusive vocabulary. But this is not to say that a contemporary rediscovery of virtue ethics needs to take on board Aristotle’s misogyny. Far from it. 7  The last decades of the twentieth century have seen a trend toward the formulation and promotion of clear codes of professional ethics for civil/public servants in many jurisdictions, especially in 6

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modern circumstances, that is to say, which is consistent with what Benjamin Constant ([1819] 1988)  called “the liberty of the Moderns." Space lacks here to delve into Smith’s moral theory, which he presented in his Theory of Moral Sentiments, but what is relevant to my purpose can be summed up as follows. As human beings, we are naturally predisposed to have “sympathy” toward one another, meaning that we can subjectively relate to our fellow human beings’ pains and pleasures. We can, therefore, indirectly experience what they experience themselves, although of course never exactly in the same terms. With a little imagination, we can also put ourselves in their shoes, as it were, when they think of us. Just as we feel joy when we observe other people expressing joy (unless we have reasons to shun them), we can imagine the joy they feel when we are ourselves joyful. This is the psycho-social background against which Smith’s cleverly designed mechanism for making moral judgments—the “impartial spectator—operates. The impartial spectator or “the ideal man within the breast” (Smith 1984), our conscience in other words, allows to become aware of, and reflect upon, the impression our actions make on others. Because we love ourselves, we aim to impress upon our friends, associates, fellow citizens at large even, the goodness of our character. The rewards we derive from their admiration is the primary motivation for behaving morally. We care about our reputation and seek to enhance it. The impartial spectator is not impartial because he/she knows a priori what is right and wrong but constitutes a mechanism through which we compare our own biases and unexamined predispositions to what we imagine is the judgement  those whom we respect (or simply regards as decent fellow citizens) pass on us.8 Could such a mechanism be instrumental in checking the tendency that market actors have to act as rent-seekers (Krueger 1974) and of political officials in given in to their pressures? Perhaps, albeit only to a limited extent. But to make that case we would have to think more positively of democratic institutions than what is implied by the Public Choice literature. One of the great merits of these institutions is that they uphold the value of publicness, that is to say, of letting both the rulers and the ruled know the factual circumstances and the normative criteria relevant to policy decisions and even to the normal functioning of state institutions. Rent-­ seekers typically prefer to pursue their goals behind closed doors, as it were. Here again, we can appeal to the notion of enlightened self-interest. Hobbes (2008, 232) himself, rather unexpectedly at least in terms of simplistic renditions of his political views, argued that it is “against his duty” for the Sovereign “to let the

the United States and Canada. Legislative bodies have also put in place a variety of visible and highly publicized institutional mechanisms to hold their members accountable. What I argue here, however, is that the effectiveness of these otherwise well crafted mechanisms still depends on the socio-cultural environment in which they function and, in particular, the existence of a vigilant and educated public. 8  A more in-depth analysis of Smith’s theory brings to light passages where he seems to suggest that there are exceptional instances when we confront ourselves to the opinion of “humanity as a whole and a more abstract notion of “reason (Smith 1984, 136). But these instances are not typical of our social lives.

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people be ignorant or misinformed of the grounds and reasons of” the rights he has to demand obedience from his subjects. Publicness and a respect for the truth rather than obfuscation and appeal to deceitful arguments—what we would call propaganda today—are more effective ways in the long run to achieve stable order. Carrying his duty in this manner is in the interest if the Sovereign considering that failing to maintain order effectively could cause his downfall.9 But the case is even more straightforward in the case of democratic institutions. Under normal circumstances, it is in the interest of elected and unelected officials to maintain a reputation of probity, competence and trustworthiness. Succumbing to pressures from various groups can damage this reputation, unless (and this is the proverbial rub!) the groups in question have a decisive influence on the electoral prospects of a politician (e.g., the farmers’ vote in a district where they are in the majority). The great advantage of democratic institutions and of the civic republican tradition upon which they rest, is that they can protect and even promote the value of publicness far more effectively than the Hobbesian Sovereign. Even honest officials who care about their reputation and their self-image might be unable to resist pressures from rent-­seekers; less honest ones might themselves be tempted to act as rent-seekers. But it is a little more difficult to do when a vigilant public (the press, public interest groups, and so on) pays attention. Even vigilant citizens have only so much time and resources at their disposal. But established procedures, e.g., parliamentary committees, auditing agencies, rules concerning the mandatory reporting of certain activities and financial transactions, and so on, should act as guardrails against a tendency to subordinate one’s enlightened interest in maintaining a reputation for probity to a more myopic interpretation of one’s self-interest (the one that Public Choice scholars tend to focus upon). For virtue ethics to function appropriately, there must exist a strong civic republican culture. I would not pretend that there has ever been a time in any liberal democracy when this was fully realized. Corruption is as old as democratic politics. But without being naïve, there are historical periods when such standards have been upheld reasonably well. The post-war decades in North America and Western Europe comes to mind. Nostalgia, however, is no a good way to address contemporary problems stemming from a near collapse of civility. But I would argue that the way out of this conundrum is neither to call for the well-meaning enforcement of deontological codes of ethics that mean little to ordinary people in positions of authority unless they can come to the conclusion that upholding them is advantageous to their careers. (Again, publicness is the key here.) Nor is it to resort to a “state of exception” to seize whatever political opportunity may arise to radically change the present order. It is rather to seek more prudent ways of restoring a civic republican culture that would make it advantageous (electorally or otherwise) for public officials to work on building their reputations as competent, and reasonably trustworthy servants of the public rather than of special interests. Unless presenting oneself as such is advantageous, little progress can be made in transforming a

 For an interesting analyses of this theme, see Waldron (2002).

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corrupting entangle political economy into a ore virtuous one (Bruni 2013). I know of no silver bullet in ties regard, but I would venture that a profound reform of the ways in which the digital world operates should be the first step in what will undoubtedly be a long journey. By the digital world I mean not only the social media which have been much in the light lately, but a wider range of phenomena, such as the ways in which public agencies and digital platform collect, use and disseminate information, the professional training of IT specialists (who are often obtuse about the biases that are built into their algorithms), among other developments that more knowledgeable analysts could expand upon with more expertise than I can offer here. All I can say is that current practices feed into a climate of distrust, misrepresentation of factual evidence and pathological cynicism. The impartial observer can do his/her work only when impartiality is a valued premise for assessing personal and public behaviour and holding public officials accountable.10

 egitimizing the Trimming of an Entangled Political Economy L Building Upon Expectations of Reciprocal Fair Treatment As I argued previously, a politics of moderation that is informed by prevailing traditions cannot, in contemporary circumstances, ignore or negate the multifaceted expectations that a vast majority of citizens have in western liberal democracies about the role of state institutions There can be no return to the pre-World War I era. Although political parties and civil society organizations sharply differ on the means of carrying out the state’s responsibilities for ensuring a minimum of social justice and protecting its citizens against what some egalitarian liberal philosopher call “brute luck,” there is something close to a consensus that the state cannot abnegate such responsibilities. And even if solutions to the problems of both remedying and adapting to climate change can—and must—come from the private sector (e.g., designing better electric vehicles), it seems inevitable that these new challenges add a new layer to the responsibilities carried out by local, subnational, and national state institutions (e.g., insurance companies will not have the financial means of compensating citizens and communities affected by climate induced natural disasters of the sort we are already witnessing, adapting infrastructure, etc.). Now does this mean that we are stuck with the current level of “entanglement” in general and existing welfare state systems? Definitely not. Costly and inefficient as the are,11 however, they cannot be simply wished away.12 But are there alternative approaches  According to Fermia (2006, 115) one of most fundamental weaknesses of the distorted form of democracy Pareto called “demagogic plutocracy was in this regime elites are not accountable to the public. 11  The unsustainability of the French public pension system is a case in point. 12  The practical impossibility of completely repealing the Affordable Care Act in the U.S. is an apt example. 10

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that, if gradually and prudently deployed, could help liberal democracies innovate in this respect? I wish to highlight two such approaches which could be mutually reinforcing. The first consists in building upon, fostering or “nudging” a natural disposition to cooperate with our fellow human beings in a wide range of settings, from the family to the firm and market dealings in general. There is no space here to analyze this phenomenon but there already exists a vast literature on the evolutionary origins of fairness, i.e., the expectation of, and actual practice of reciprocal interactions, both positive and negative, i.e., incurring costs to punish freeloaders (Binmore 2005; Bowles and Gintis 2013; Dobuzinskis 2022, chapter 8; Hodgson 2021, chapter 9). This stream overlaps with, or complements, works on reciprocal altruism that draw more from anthropological sources or experimental psychology, other authors (e.g., Kolm and Ythier 2006) which emphasize the need to abandon the premise that economics rests exclusively on a narrow definition of self-interest. Although one should resist the temptation of veering 180° in the opposite direction, it seems safe to say that they can be taken to mean that a market economy is not the site of ruthless competition depicted by late nineteenth century social Darwinists. On the contrary, as Robert Sugden (2018, 2019) aptly puts it, “a community of advantage” in which, as J.S. Mill already thought, “people come to see one another as cooperative partners rather than as rivals in a zero-sum game (2019, 417).13 The implications of this paradigm for political economy are not totally one-­ sided, by which I mean that they cannot be invoked as “scientific proofs” of the validity of a classical liberal defence of the Oakeshottian notion of “civil association”; in fact, Bowles and Gintis (2011) or Hodgson (2021) lean more in a social democratic direction. Nevertheless, these theoretical developments open a path toward a reappropriation of an old tradition that promotes philanthropy and community-­based mutual aid as remedies for socio-economic inequalities. This is a path that John Tomasi (2012) has chosen to explore with unbridled enthusiasm.14 From my more pragmatic or moderate standpoint, I would suggest that this path is not likely to go as far as Tomasi hopes in trimming down the welfare state. Political obstacles will quickly be encountered in trying to push this program beyond feasible limits—again, planning to abolish planning could fall into the rationalist trap. But there certainly are many unused opportunities for relying more extensively on the voluntary sector to address a host of social problems, from drug addiction to homelessness. And fiscal constraints are likely to motivate state bureaucracies to rely more and more on these opportunities if/when they are present (the philanthropic network is far more extensive in the United States than in many other countries where this “solution” still is largely unavailable). Desirable as the philanthropic route may be, it has rather constraining limits. Again, we come across the problem of legitimation. We are not yet at the point where “enterprise associations’ in the public sphere can be wished away. But there

13 14

 See also the various contributions to Garnett et al. (2015).  See also Beito (2000) whom Wagner (2020, 300) cites approvingly.

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is a way to reconceptualize the balance between civil association and enterprise associations that is more conducive to individual initiative and the ideal of freedom than existing social policy programs and the entangled networks they generate. That option has been variously characterized as “predistribution” or an “asset-based” approach; John Rawls’ concept of “property-owning democracy” also fits into this paradigm. The Italian school of normative economics know as “civil economy” (Bruni 2006, 2015; Bruni and Zamagni 2016; Zamagni 2018) which can be traced back to the eighteenth century Neapolitan school of political economy, provides a theoretical context for these practical proposals. A more contemporary source is the idea of the “Big Society” which the British Prime Minister David Cameron borrowed from Jesse Norman, who himself is an Oakeshottian theorist.15The key idea here is that it is far preferable to empower individuals to participate in competitive markets successfully than to compensate them ex post facto if they happen to be disadvantaged. Rather that redistribute incomes from high earners to low earners, these schemes transfer assets to individuals who have none, thereby enabling them to invest in their own human capital, become entrepreneurs or simply save to face occasional difficulties. There are many possible ways of implementing this paradigm which range form the least coercive and/or costly (e.g., facilitating access to home ownership for low-income families) to more ambitious ones such as Bruce Ackerman’s (Ackerman and Alstott 1998) proposal of a substantial “stakeholder grant” which young adults would receive to set them up in life. The German codetermination process which allocates half of the seats on the boards of medium and large corporations is another apt illustration insofar as it empowers employees to make decisions about their own well-being and status. Although not exactly qualifying as an asset-based approach, the concept of a guaranteed basic income (BIG) arguably has more in common with this paradigm than with the conventional welfare state model (employed individuals could use their basic income to build some savings and use it to purchase financial assets, real estate or invest in their education). Some caveats apply, of course. Hard-nosed realists may think that these theoretical perspectives put too much faith in the “better angels of our nature” and downplay the harsh realities of power.16 There is a grain of truth in that objection, but it is important to realize that the “enlightened self-interest” paradigm does not posit that economic agents or political actors are truly altruistic or selflessly devoted to the common good. It simply means that when there are opportunities for mutual and reciprocal benefits, there is a reasonable chance that they will be seized, and that contrary to Schmitt’s dark view of the world, antagonistic relations of enmity are only one of many possible ways in which what Oakeshott calls political “practice” can be experienced, even on the international scene. Seeing the world only through the lens of zero-sum games can become a self-fulfilling prophecy but enmity is not destiny. Complex socio-economic systems cannot be steered from an all-knowing  See Norman (2008).  Wagner (2013) has argued that Bruni’s civil economy approach grants too much significance to the stag hunt game as a way of modelling competitive encounters which may not always turn out so well for the players involved. 15 16

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and omnipotent centre and reshaped at will but there are many opportunities for experimentation and reforms. I have attempted to outline a prudent path for undertaking such efforts.

Conclusion Burnham’s Machiavellians were right in denouncing utopian reamers who claim to be serving some greater, transcending good. Either they are “true believers” but their dreams turn to tragedy, or they are insincere and their lofty goals are merely a façade for the pursuit more sinister plans. Better then to realistically face the fact that self-interest is everywhere. However, it operates differently in different spheres: it is dysfunctional in the political sphere whereas it is far more efficient in the market economy, It follows, therefore, that the reach of the political sphere should be reduced—especially in view of the fact that an immensely complex and less than optimally efficient entangled political economy has evolved over the course of many decades—and rely more on the latter for coordinating economic and social projects. In this paper I have advanced three counter arguments. The first had to do with the feasibility and reasonableness of this plan, especially if it is argued that it should be resolutely pursued in a relatively short time span if the opportunity arises. Using arguments borrowed from Oakeshott, I have argued that at least in liberal pluralist, complex democracies, politics or the “political” are activities that cannot easily be optimized. Rationalism is not the proper method of effecting viable, prudent transformations. Attention ought to be paid to traditions, practical usages, current institutional norms, and so on. As Oakeshott (1991, 7) observes: “of all the worlds, politics might seem the least amenable to rationalist treatment—politics, always so deeply veined with both the traditional, the circumstantial and the transitory.” Consequently, one may have to settle for second-best compromises. This is not to say that one should acquiesce to a status quo which has indeed lost touch with classical liberal values embodied in the Oakeshottian notion of “civil enterprise”. But reforms that are not conducted in a spirit of civility and prudent experimentation are likely to cause more harm than good. There can be no return to an idealized golden age of liberalism. My second and third point take issue with the Machiavellians denigration of “sentiments.” I reject the contrast between misguided beliefs, false myths and utopian ideologies, on the one hand, and unsentimental but effective self-interest. I insist on the theoretical power and practical relevance of a hybrid notion conveniently, albeit perhaps not perfectly captured by the trope of “enlightened self-interest.” I have intimated (without being able to develop that argument in-­depth because of obvious space limitations in a book chapter) that enlightened self-­interest is at the root of Smith’s virtue ethics and that his concept of an impartial spectator could be deployed to place checks on corruption and rampant rent seeking. I concede that this approach cannot, on its own, eradicate the problem, But certainly it is worth

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further exploring at the theoretical level, and implementing at the practical level by reinforcing democratic accountability. Finally, I have argued that a disentangled political economy cannot practically, and ought not ethically, be coterminous with the dismantlement of the welfare state without proposing some alternatives. Precisely because these alternatives can and ought to be multiple, I have suggested that experimenting with a range of innovative asset-based or predistributive schemes (of which I only have space in this paper to mention a few) opens a promising path toward a more “virtuous” entangled political economy in which free and autonomous citizens can effectively pursue their own goals without overburdening the state.

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Kolm, Serge-Christophe and Jean Mercier Ythier, eds. 2006.  Handbook of the Economics of Giving, Altruism and Reciprocity. Amsterdam: Elsevier. Krueger, A.O. 1974. The Political Economy of the Rent Seeking Society. American Economic Review 64: 291–303. Machiavelli, Niccolò. 2005. The Prince. Trans. Peter Bondanella. Oxford: Oxford University Press, ProQuest Ebook Central. Norman, Jesse. 2008. Compassionate Economics: The Social Foundations of Economic Prosperity. Buckingham: University of Buckingham Press. O’Sullivan, Noël. 2014. Oakeshott on Modernity and the Crisis of Legitimacy in Contemporary Western Liberal Democracy. COSMOS + TAXIS 1 (3): 20–26. Oakeshott, Michael. (1975) 2003. On Human Conduct. Oxford: Oxford University Press. ———. 1991. Rationalism in Politics and Other Essays. Indianapolis: Liberty Fund. Rasmussen, Dennis C. 2013. The Pragmatic Enlightenment Recovering the Liberalism of Hume, Smith, Montesquieu, and Voltaire. Cambridge: Cambridge University Press. Schmitt, Carl. 2005. Political Theology: Four Chapters on the Concept of Sovereignty. Trans. G. Schwab. Chicago: University Of Chicago Press. Smith, Adam. 1984. The Theory of Moral Sentiments. Indianapolis: Liberty Press. Sterpan, Ion, and Richard E.  Wagner. 2017. The Autonomy of the Political Within Political Economy. In The Austrian and Bloomington Schools of Political Economy, Advances in Austrian Economics Series Vol. 22, ed. P.D.  Agilica, P.  Lewis, and V.H.  Storr, 133–157. Bingley: Emerald Publishing. Sugden, Robert. 2018. The Community of Advantage: A Behavioural Economist’s Defence of the Market. Oxford: Oxford University Press. ———. 2019. The Community of Advantage. Economic Affairs 39: 417–423. Tomasi, John. 2012. Free Market Fairness. Princeton: Princeton University Press. Tralau. 2010. Thomas Hobbes Carl Schmitt and Three Conceptions of Politics. Critical Review of International Social and Political Philosophy 13(2-3): 261–274. https://doi. org/10.1080/13698231003787737 Tregenza, Ian. 2002. Leviathan as Myth: Michael Oakeshott and Carl Schmitt on Hobbes and the Critique of Rationalism. Cotemporary Political Theory 1: 349–369. Wagner, Richard E. 1993. Parchment, Guns and Constitutional Order. Cheltenham: Edward Elgar. ———. 2006. Retrogressive Regime Drift within a Theory of Emergent Order. Review of Austrian Economics 19: 113–123. ———. 2013. Game Theory and the Architecture of Social Theory: Reflections on Luigino Bruni’s Ethos of the Market. George Mason University Department of Economics, Working Paper No. 13–26. ———. 2016. Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy. Cheltenham: Edward Elgar. ——— . 2019. Governance within a System of Entangled Political Economy. 107: 101918. https:// doi.org/10.1016/j.forpol.2019.05.004 ———. 2020. Macroeconomics as Systems Theory: Transcending the Micro-Macro Dichotomy. London: Palgrave. Waldron, Jeremy. 2002. Hobbes and the Principe of Publicity. In Skepticism, Individuality, and Freedom, ed. B. Honig and D.R. Mapel. Minneapolis: University of Minnesota Press. Zamagni, Stefano. 2018. The Common Good and the Civil Economy. In Searching for the Common Good, eds. M. Nebel and T. Collaud 79–98. Nomos Verlagsgesellschaft.

Mr. President, Tear Down This Fence David J. Hebert and Nicholas M. Arnold

Introduction What is the role of constitutions in a society? At a superficial level, we can define a constitution the way Buchanan (2001) does by noting that a constitution is a set of rules detailing how a group will make a collective decision. After all, as Buchanan and Congleton (2000) describes, groups of people cannot arrive at a consensus without some sense of how that decision will be made. This consensus could be arrived at in innumerable ways – the group could hold a vote with various majority rule thresholds, they could elect a member of the group as a figurehead to make decisions in a dictatorial way, or they could use a form of a (non)weighted random number generator, to name but a few. In some instances, these constitutional rules detail formal procedures and informal decorum, such as Article 1 § 7, which requires that “All Bills for raising revenue shall originate in the House of Representatives.” In other instances, constitutional rules restrict the domain of post-constitutional rules, such as the First Amendment, which states that “Congress shall make no law… abridging the freedom of speech, or of the press.” Once in place, a constitution is a set of agreed upon rules for decision-making. In the United States,1 constitutional rules would include The Constitution, which lays  We focus our chapter on the United States not because it holds any special analytical purpose but merely because it is the one which we happen to be the most familiar with. The discussion and analyses contained herein apply with equal force to all governments with but slight contextual modification. 1

D. J. Hebert (*) Economics Department, Aquinas College, Grand Rapids, MI, USA e-mail: [email protected] N. M. Arnold Aquinas College (student), Grand Rapids, MI, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_7

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out specific charges for the three branches of the federal government, and would also include the Rules of the Senate and the Rules of the House of Representatives. These latter two documents describe the processes by which the respective chambers will arrive at a collective decision, thus they meet the criteria for being considered a “constitution,” even though this is not typically acknowledged. Going beyond this superficial level, however, introduces two broad strands through which we can theorize about the symbolic natures of these rules. The first, which we describe as the “reasoned strand,” views constitutional rules as a distillation of received wisdom from the past. These rules are put in place because earlier governments did not have them, leading to unintended consequences that adversely affected the lives of the citizens, the operation of the government, or both. This branch typically connotes a conservative approach to politics, in the sense that constitutional rules are designed to prevent bad policies and not necessarily to empower good policymakers to bring about good policies. Within this approach, gridlock is a feature of the political system, not a bug. The second strand is what we refer to as the “sentimental strand.” Here, constitutions are viewed as rules which prohibit certain actions by policymakers but not certain outcomes. This strand typically connotes an applied statecraft approach to politics in the sense that society’s ills could be mitigated with properly designed and implemented legislation. Constitutional rules, therefore, are roadblocks on the path to passing legislation that would improve the world. With any roadblock, travelers have the option of attempting to go through, over, or around said roadblock to arrive at their final destination. Thus, within this framework, politics is a game of trying to find ways around restrictions created by constitutions. Importantly, neither branch explicitly precludes any particular post-­constitutional outcome. However, the nature, processes, and discussion surrounding a proposed constitutionally-contested post-constitutional rule will be different under the two strands. The reasoned strand might be best captured by the notions of the Chesterton Fence and Buchanan’s “relatively-absolute absolutes.” The sentimental strand, by contrast, might be considered a scientistic or “optimal policy design” understanding of the world. The aim of this chapter is not to castigate any policymaker, to criticize any policy as “unconstitutional” by some metric, or to weigh in on any policy debates or discussions, past or present. Insofar as these are discussed, it is merely for illustrative purposes. Rather, our goal is twofold. First, this chapter seeks to offer an explanation of observed policy discussions and outcomes in light of two differing understandings of constitutional rules, specifically whether these rules represent received wisdom or roadblocks. To be sure, there is an element of both in all instances, so the analysis will be murky. Likewise, sentiment can hide behind a facade of reason and reason behind a facade of sentiment, further complicating the discussion. Nonetheless, we find it useful to elucidate these two extremes and to present them as if they were clear in order to shed light on the entire spectrum. Differing readers may interpret the specific examples differently than we do. We hope that the surrounding discussion clarifies the general points that this chapter makes, even if and when differences of interpretation occur.

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Second, this chapter seeks to explain why elected officials tend to follow the sentimental approach. With the increase in both the scale and scope of government activity over the last century, being in a position to control or otherwise influence the direction of federal action is desirable to say the least. Sentiment, and with it the accompanying view of politics as applied statecraft, takes as given the desirability of the ends decided upon and concerns itself with the means by which those ends can be achieved. Finally, this chapter seeks to address the perennial question of how constitutions are to be maintained in the face of both policy and institutional entrepreneurship (Martin and Thomas 2013). Maintaining constitutions can be a difficult task. Colorful analogies of this task, ranging from referring to the allure of sentimentalist justifications as similar to the call of the Sirens in Homer’s Odyssey to Hesiod’s Pandora’s box. We, however, do not share this pessimism and instead argue that a realist approach to understanding and doing politics is feasible, though challenging. This chapter contributes to a growing strand of literature that offers explanatory rather than hortatory explanations of observed policy outcomes. See for example, Hebert and Wagner (2013). It also contributes to the discussion of the differences between private and public organizations, as found in Wagner (2016).

Founding Documents As a formal matter, constituting an organization should be a relatively straight-­ forward activity. A group of people come together to decide on what purpose the organization will serve, how its leaders will be chosen (if any are chosen), what each person will be responsible for, and how the people will come together to make a collective decision. Importantly, these collective decisions must bind the hands of even the people who disagree with the decision. This is commonplace in everyday life. As a trivial example, we could imagine a group of friends trying to decide where to go for dinner one night. This group of friends might reasonably agree that eating together is preferable to eating separately, no matter where the group dines, but each person might have different rank order preferences for where to eat. They might also decide that voting on where to go for dinner is an effective means by which to make a decision. Suppose that after the votes are tallied, going out for hamburgers and beer is the winner. Even the people who voted for, say, pizza would be bound by the group’s decision to go out for hamburgers and beer that evening. To be sure, it would be difficult to imagine a group of friends first sitting down to formally write down the rules and processes for decision-making and require that each person formally accept these rules before the process of deciding on where to have dinner can begin. Nonetheless, we can readily understand that something similar must have happened at least in the minds of the friends, especially when reputations and norms have been established. For-profit corporations engage in a similar activity when they are chartered. A purpose for the corporation’s existence is established and for our purposes, all

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for-profit corporations are chartered for the same reason: to earn profit. To be sure, it is unlikely that any corporation charters itself with “earn profit” as the stated purpose, but it is the ultimate purpose nonetheless, as Friedman (1970) describes. Once chartered, members of the board are chosen or appointed, roles are defined, and processes for decision-making are laid out. An automotive company, for example, will be chartered with the purpose being to earn profit by creating automobiles that sell well. While there are many decisions involved in determining what is necessary and proper to create automobiles (does the company need to make its own windshields, frames, door handles, etc., or will they use an outside supplier to make these instead?), there are also limits on this. An automobile manufacturer will not, for example, dabble into the realm of large scale commercial farming even though its employees must eat and drink at some point. Unlike the group of friends, however, this charter will be explicitly written and agreed upon by all present, if only for the legal protections afforded a written charter if and when there are disputes. The same can be said for the constituting of a nation, though the purpose of the nation is much broader than that of a corporation or group of friends, and includes vague notions such as “establishing justice” and “promoting general welfare.” Nonetheless, a group of people come together to decide on what are now known as “constitutional rules,” which delineate various offices, organizations, and structures and processes for decision-making in a matter very similar to the chartering of a corporation. In the US Constitution, for example, Article I Section 1 specifies that “all legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives” while Article II Section 1 states that “the executive Power shall be vested in a President of the United States of America.” The remaining sections of Articles I and II describe the roles of each of these offices, how officers will be selected, and how frequently they will be (re)selected. In each of these cases, the rules established by the various groups described are arrived at through deliberations, however short they may be. A group of friends may spend virtually zero time deliberating on the rule of “majority wins,” reflecting the fact that their group has been constituted for a single decision and will be reconstituted when future group dinners occur. The US Constitutional Convention, by comparison, took a full 116 days to come up with the final draft of the US Constitution reflecting the fact that this document was intended to be the founding document of a nation which will (hopefully) exist in perpetuity.2 We can safely assume that chartering a for-profit company takes some amount of time greater than zero, too, if only because of the legal complexity of doing so. Implicitly, the rules governing a for-profit company and a nation are arrived at at least somewhat carefully and are a reflection of the shared values of the members of the group. Whatever rules and processes are decided upon, they are selected in lieu  This length of time is most assuredly an underestimate, as one could (and we submit, should) view these 116 days as encapsulating received wisdom from previous political institutions from around the world and across time, thus meaning that the writing of the US Constitution was really the culmination of generations or centuries of political thought. 2

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of alternative rules for reasons. These reasons may not be written down in the body of the document but likely emerged through the deliberative process of discussion and debate. In some cases, they are written down in separate documents, such as private journals, memoirs, and the like. For example, James Madison notes several such instances of these during the Constitutional Convention (Madison, 1966). Because they are not written down as a part of the founding document, these reasons may be lost to time by future generations, who only inherit the result of these deliberations and not the process and understanding of the deliberations that led to the result. Here, we are reminded of G.K. Chesteron’s famous example: There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

Here, Chesterton (1990) is cautioning future reformers against changing established rules and procedures for the sake of expediency. The rules exist for reasons and while their existence does not imply their permanence, it does imply a need for a certain level of deference to their existence and an understanding of their purpose before changes from the status quo are made, especially for rules or traditions that have “stood the test of time.” Buchanan (1999) makes reference to this same principle with his notion of the “relatively-absolute absolutes.”3 Thus, while rules and procedures established in the past can be changed, they ought not be changed on a whim to suit the demands of the present day without an understanding and appreciation of why they exist in the first place.

Rules, Procedures, and Getting Things Done We now turn our attention to the differences between a for-profit corporation and a government. To narrow our discussion, we shall confine ourselves to considering differences between these two in the context of the principles espoused in the founding documents and the subsequent behaviors of the people tasked with fulfilling the purposes established in those documents. As a formal matter, all people, regardless of their setting, are chiefly concerned with getting any given task done in a way that maximizes the difference between benefits and costs (i.e. net benefits). Differences in observed behaviors arise due to differences in the institutional settings, which determine what the task being undertaken is and how performance will be measured or judged (Wagner 2016). However, we should also note that while people are often intelligent, they are not omniscient. Making a decision today that will only manifest in the future

 See Boettke and King (2021) for a more detailed discussion of the relatively-absolute absolutes.

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necessarily entails a degree of forecasting. Sometimes, decisions made in the past work out just as planned. Other times, they do not. To err is human. But what is of concern to us here is the presence of feedback – specifically, the distinction between “strong” and “weak” feedback as elucidated in Martin (2010) – and the ability and tendency for responding to that feedback.

Corporations Guided by Reason In the case of for-profit corporations, board members and C-Level Executives are given significant power in determining the direction and activities of the corporation. Consider a company’s Chief Executive Officer (CEO). While the nuanced specifics of this person’s role vary from corporation to corporation, the role of the CEO is typically summarized as managing the overall operations of the corporation with their goals being to increase the profitability of the corporation and to increase the price of its shares. This person is typically elected by the board of directors and the corporation’s shareholders. Their success or failure is judged along exactly one metric: did the corporation increase its profitability or not? In a world characterized by voluntary exchange, profit can only be earned by providing customers with a good or service at a price they are willing to pay. Or, as Walter Williams liked to say, profit is earned “through pleasing and serving one’s fellow man,” (Williams 2005). A for-profit corporation that fails to please and serve its customers is one that will quickly find itself going out of business. If the corporation, at the behest of the CEO, were to undertake activities that did not please and serve its customers, they would fail to earn profit that could have otherwise been earned. Customers may be subject to whims and fancies, but few routinely continue to purchase goods and services from a corporation that fails to please and serve them, thus there is at least some discipline, as Friedman (1970) describes, to the behavior of a corporation. Consider Apple, Inc. and the history of the company. From its inception, Apple was a computer company, primarily concerned with creating both the hardware and the software that ran on their machines. Then, in October of 2001, Apple launched a new product: the iPod. While at a superficial level, the iPod is a computer that does only one task (play music), it represented a radical shift in the direction of the company and was inspired in large part by the company’s then-CEO, Steve Jobs. Jobs made this transition because he believed that it would result in better fulfilling the implicit purpose of Apple: to earn profit by pleasing and serving its customers. In creating this product, he leveraged existing expertise that Apple already had and created a product that, for lack of a better phrase, changed the world. Thus, his decisions were guided by reason. To be sure, he took a tremendous amount of risk in making this decision, but that risk was fundamentally a reasoned risk. There was no deviation from established purposes, rules, or roles in this decision. As a comparison, consider Microsoft’s decision in 2006 to enter the MP3 player world with the ill-fated Microsoft Zune. Despite the Zune’s impressive technical abilities, in many cases being vastly superior to the iPod of the time, and Microsoft’s

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repeated attempts to bolster its sales, the Zune ultimately failed and was discontinued in 2012. The system of profits and losses acts as a feedback mechanism to producers. In this sense, it is strong feedback (Martin 2010) in that Microsoft bears the cost of this failure and must answer to their Board and stockholders for failing to achieve the desired result: to please and serve their customers in a way that generates profit. To be sure, Microsoft could have instead blamed consumers for not zealously purchasing what was in the minds of Microsoft executives a viable and superior product, but the consumers had spoken and had exercised their option to instead purchase an iPod from Apple. Thus, Microsoft was faced with a dilemma: continue producing a product that was not selling enough to cover its costs or discontinue the product. That they chose the latter should be of no surprise.

Governments Guided by Sentiment Like for-profit corporations, legislative members and members of the executive branch are also given significant power in determining the direction and activities of the government they serve. Consider a member of the US Senate. This senator is tasked with drafting legislation and voting on proposed legislation on the floor of the Senate. They are elected not by board members or shareholders, but by constituents, and are elected to represent those constituents in the Senate. Like a CEO, their success or failure is judged along exactly one metric: did they get (re)elected or not? This small change severs the link between the principles espoused in the founding document and the subsequent behaviors of, in this case, the Senator. In order to get elected and subsequently re-elected, a Senator must deliver what at least the majority of their constituents desires better than any alternative that their constituents may send in their stead. Thus, we could say that constituents have certain legislative goals in mind when selecting in this case a Senator to send to the Senate on their behalf. Voters almost assuredly care little for how these goals are accomplished, instead caring simply that these goals are accomplished. There are a myriad of ways by which a legislative goal could be accomplished. Consider pollution as an example. Polluting behavior could be regulated to a some level or it could be taxed. Alternatively, alternative technologies or production techniques that would result in less pollution being emitted could be subsidized. Any one of these would, in principle, cause a decrease in the polluting behavior (or, at least, a decrease in pollution). To be sure, some may be more effective than others and differences in second order effects (often referred to as “unintended consequences”) will surely exist, but all would achieve the first order effect to at least some extent. To select among these differing means, a Senator behaves in much the same way that we would expect market participants to behave: they select the means that best achieves the results over and above the cost of doing so. The cost of doing so can be thought of as securing the requisite number of votes in both the House and the Senate and obtaining the President’s signature for final passage.

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We choose the US Senate in particular because of some quirks in its rules that allow us to illustrate our point most clearly. While this is at some level cherry-­ picking our example, the following discussion applies to any and all legislative assemblies with but slight modification. In the US Senate, all bills are passed with a simple majority. However, most ordinary bills require that debate be allowed, which can only be ended by invoking what is known as “cloture.” To invoke cloture, a Senator must make a motion to do so. At this point, a vote is called and, in order for the motion for cloture to carry, it must receive at least 60 votes. Once cloture is invoked, the bill can then be voted upon, which again needs only garner 51 votes to pass. This difference between “invoking cloture” and “voting on the bill” has led to what is now known as the filibuster, whereby members of a minority party can simply refuse to support a motion for cloture and effectively prevent a bill from being voted on. Democratic majority leader Chuck Schumer’s call to “end the Senate filibuster,” then, is really a call to allow cloture to be invoked with a mere 51 votes rather than the traditional 60. While the requirement of 60 votes to invoke cloture is not in the US Constitution, it is in the Rules of the Senate, thus it satisfies our definition of a “constitutional rule” even if it is not a “Constitutional rule.” Not all bills require cloture to be invoked, though. Some bills, for example budgetary bills affecting either revenue or spending considered after the passage of a new budget resolution or a continuing resolution, do not require cloture and thus can be approved with a simple majority of votes in the Senate. This process is commonly referred to under the heading “budget reconciliation.” In politics, the name of the game is to build what are referred to as “minimum winning coalitions.” The term comes from the idea that a bill’s success depends on garnering the minimum number of votes necessary for its passage. Thus, one effective strategy for getting a bill passed through the Senate is not just to build a minimum winning coalition, but to minimize the size minimum winning coalition necessary to pass a bill. The issue of gun control presents a useful illustration of this. Suppose, for example, that a majority of a Senator’s constituents wish to see changes making it more difficult for ordinary people to acquire assault weapons. In light of recent events in the United States, this is not a wholly unreasonable desire. Standing in the way of achieving this, however, is the Second Amendment and an obstinate Republican party, which as of this writing has 50 seats in the US Senate. Changing the Constitution is an arduous, though not impossible, task that has only been done a handful of times. Passing any ordinary piece of legislation through the Senate requires 60 votes to invoke cloture, thus requiring at least 10 Republicans to do so in this instance. Since the Republicans know that the bill would pass if they voted to invoke cloture, they do not do so. From the perspective of this Senator, changing the Constitution would achieve the goal but is prohibitively costly. Likewise, passing legislation would achieve the goal of making assault weapons more difficult to acquire, but with an effective 60 vote requirement in the Senate and a Republican party that is galvanized around blocking this sort of legislation, this is similarly prohibitively costly.

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However, if a Senator can find a way to reduce the number of votes required to achieve the same legislative goal from 60 to 51, they would effectively reduce the cost of passing the legislation. Within the Rules of the Senate, most bills require 60 votes to pass, but not all. Specifically, revenue measures only require a 51 vote majority to pass. Unfortunately for the Senator, all bills pertaining to revenue must originate in the House of Representatives per the US Constitution. Fortunately for this Senator, Rep. Don Beyer (D-VA) of the US House of Representatives has proposed a 1000% tax on semi-automatic weapons. Because it is a tax and not an outright ban, the proposal qualifies as a revenue measure in the US Senate. In fact, Rep. Beyer has specifically referred to this tax as a means of “[cutting] through the gridlock and [getting] it done.” Regardless of one’s stance on what the Second Amendment means, it should be clear that this is a means of getting around a principle enshrined in either the US Constitution (if one takes the Second Amendment as an outright ban on all restrictions on weapons) or the Rules of the Senate, which ordinarily requiring 60 votes as a means of forcing collaboration, compromise, or both between the majority and minority parties.4 This approach to constitutionality that perceives it as a roadblock to bettering society is not particularly new, and has been evaluated by many historical thinkers including James Burnham in Machiavellians, where he argues “that political doctrines which promise utopias and absolute justice are very likely to lead to much worse social effects than doctrines less entrancing in appearance; that utopian programs may even be the most convenient of cloaks for those whose real aims are most rightly suspect” (Burnham 1943). In other words, Utopianist and idealist political ideology is inextricably intertwined with a constitutional framework that views it as a hindrance to progress. Burnham’s conceptualizations lead into another relevant aspect of the discussion at hand: the use of facades, or “cloaks” as Burnham calls them, to pursue a political ends.

Sentiment, Reason, and the Use of Facades This brings our discussion naturally to one of facades. As we noted above, reason can hide behind a facade of sentiment and sentiment behind one of reason. These facades, however, point to a distinction between logical and non-logical action as articulated in Wagner (2016) and Pareto (1935).

 Note that we are not taking a stance on the “goodness” or “badness” of the goal of “making it more difficult for ordinary people to acquire assault weapons.” We are simply pointing out that, whether one views this particular instance of gamesmanship as “necessary” or “an affront,” it is gamesmanship all the same. 4

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Business: Reason Behind a Facade of Sentiment It is no secret that consumers, in general, have become “woke” to a whole host of concerns. For example, consumers today are much more likely to care not just about the price of a product and its quality, but also whether a product was made using e.g. sweatshop labor, if crops were grown on pesticide-free farms, or the size of the carbon footprint of the company producing the product. To be sure, many of these notions require more than simple surface-level thought,5 but to say that consumers do not care about these concerns or (in our estimation) worse yet, to say that consumers ought not to care about these concerns would most surely be false.6 Thus, companies now must please and serve their customers not just along the dimensions of price vs. quality but also along an orthogonal dimension of “wokeness.” We can very easily imagine a person shopping for groceries who not just willingly but enthusiastically pays a higher price for a smaller, less nutritious vegetable that was grown on a pesticide-free farm than they could have for a larger, more nutritious vegetable grown on a farm that uses pesticides. To be sure, there are likely some people who, as a matter of personal health, have medical reasons for desiring pesticide-­free crops. However, it seems unlikely that the incidence of this matches shopping data. Again, we consider Apple, this time their 2020 decisions to (1) no longer include a charger in the box of their flagship product, the iPhone and (2) switch the wrapping of their products from plastic to a paper-based wrapper. Publicly, these decisions were made in an effort to curb e-waste and to promote the use of more sustainable and environmentally conscious materials. While these are, in our framework, sentimental justifications for their behavior, we can also interpret them as a means by which Apple managed to please and serve their customers, thus they qualify as decisions ultimately guided by reason.7

Politics: Sentiment Behind a Facade of Reason Why, then, does sentiment dominate in politics? Somin (2013) documents how political ignorance grows as governments expand in both size and scope of activities. Here, the idea is that as a government expands, the amount of knowledge held by the public of what governments do, how they do the things that they do, and why is minimal. This, as Wagner (2016, p. 128) notes, is often summarized under the

 For example, what, exactly, constitutes a “sweatshop?” What, exactly, constitutes a “pesticide?” How, exactly, is a company’s carbon footprint calculated? Etc. 6  Note that this is different from saying that their concern causes the opposite of the desired effect. See, for example, Powell (2014). 7  More pessimistically, these decisions can be viewed as a costly signal. Not as costly to Apple and other large companies, but significantly more costly to smaller companies. 5

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heading of “rational ignorance” in that “the value to the voter of acquiring information about candidates prior to voting is near zero because the probability that a particular voter’s vote will determined the outcome of an election is practically zero in anything but truly tiny constituencies.” Brennan and Lomasky (1993), instead of describing elections as taking place among informed citizens rationally choosing the best candidate(s) for office, vote in a way that is better characterized as “expressive” in much the same way that people cheer for a local athletics team. In other words, the goal of any elected official is to deliver what it is that the electorate wants, regardless of what it is that the electorate wants. To do this requires viewing constitutional rules as obstacles on the road to progress to be overcome. Furthermore, this reality disadvantages the reasoned approach to policy and constitutionality, tending to favor ideologues and individuals making appeals to emotion and making arguments rooted in strong pathos over those arguments made out of strictly logic and reason. Such an ideologue, as is discussed by James Burnham, is not “a primarily ‘rational animal’ when the reformers tell us that society can be improved” (1943). Thanks to the rules of the US Congress, the majority party receives special consideration in virtually all matters. Members of their party will, for example, chair all committees, effectively giving them agenda-setting powers over committee hearings. They will also have agenda-setting power over the bills that come to the floor for a final vote. Buchanan & Tullock (1962, Appendix A) provides evidence that with this power comes the ability to control or otherwise influence the final outcome of legislative debate. Hebert (2019) extends this by noting the power that majority parties have in enforcing “pre-existing legislative majorities” on committee outcomes and provides a geometric model explaining wide differences in legislative outcomes despite miniscule changes in committee composition when the majority party changes. Because of the special consideration given to the majority party, party officials will wish to maintain this position. To maintain this position requires them to maintain their seats in the chamber lest they lose seats and become the minority party. To do this, they must deliver that which their constituents want. Thus, when constitutional rules might otherwise prohibit a given legislative outcome, the task is clear: find a way around the legislative outcomes. The minority party, by contrast, is in a dis-privileged position in that they are unable to bring any original legislation onto the floor for consideration without the approval of the majority party’s leader. Bringing bills to the floor would potentially confer a benefit to the minority party and so a majority party leader is likely to be unwilling to do so. It is for this reason, we argue, that minority party members are more likely to make reference to Constitutional rules precluding or otherwise preventing certain legislative outcomes. Consider, for example, the repeated Constitutional challenges to the Affordable Care Act (ACA) from 2010 onward, reasoning that this was an overreach of the Federal government into a realm that it had no Constitutional basis for entering. When the ACA was initially proposed and subsequently passed, it was presumed that the Commerce Clause, which allows the Federal government to regulate all interstate commerce, authorized mandating individuals to purchase coverage

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through the ACA. This was deemed unconstitutional, so Congressional Democrats changed the mandate to a tax placed on individuals who do not purchase coverage through the ACA, which was upheld as constitutional. Here again, we see evidence that a majority party (the Democrats at the time), trying to deliver what the majority of their constituents wanted, viewing constitutional rules as roadblocks to progress and not as an enshrinement of received wisdom. In this instance, the Republican party was the minority party in Congress. Here, the constitutional challenges to the ACA were virtually (if not literally) all sponsored by Republican groups or Republican-backed groups. While these challenges certainly appealed to constitutional considerations, we would be remiss if we did not point out that they were nonetheless guided by sentiment and not necessarily reason in that Republicans were really just trying to stop the passage of the bill and were using the Court (instead of the legislative process) to do so.

Entangled Political Economy and the Spread of Sentiment Why then does sentiment seem to be dominant even in the for-profit business landscape today? One answer, partially given above, is that consumers have suddenly “awoken” to social concerns and are now demanding that major corporations serve some social goal(s) other than generating profit. On its face, there is nothing intrinsically wrong with this, as private companies have a vested interest in finding ways to please and serve their customers regardless of what “service” entails. For example, in the first 12–18  months of the pandemic, several companies shifted from merely providing their wares to also providing shoppers with a safe means of shopping (Hebert and Curry 2022; Leeson and Rouanet 2021). While perhaps not invoking the same measures of “wokeness” as calls for, e.g., producing wares without the use of sweatshop labor, the logic remains the same: consumers care about more than merely “price” and “quality” in the traditional economic senses and so private, for-­ profit firms addressed these concerns. While advertisements during this time period may have made reference to concepts such as “improving community health” and “ensuring safety” and other such sentimental justifications for doing so, we can also readily understand firms adopting their various responses to the pandemic as a reasoned response aimed at furthering their ultimate goal: maximizing profit through pleasing and serving their customers. Further, there is certainly nothing nefarious about this type of incorporating these types of responses into the firm’s day-to-day conduct. However, this does not mean that all attempts at masquerading reason behind a facade of sentiment by private, for-profit corporations are always and everywhere innocent. Here, we are reminded of Bruce Yandle’s classic, Baptists and Bootleggers type of reasoning (Yandle 1983; Smith and Yandle 2014). Consider the US cigarette and tobacco industry and the subsequent bans on advertising in public spaces. Prior to the federal ban on advertising, cigarette companies routinely sponsored television and radio programs through commercials and product placement. Today, this is no

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longer the case. Interestingly, the tobacco industry itself was ready to comply with this ban and, indeed, helped lobby Congress for these bans. In a seminal paper, Doron (1979) presents the advertising decision faced by tobacco companies as a form of prisoner’s dilemma. In his words, “while the regulation may be initiated for the sake of the ‘public interest,’ the practical consequences may be compatible with the ‘self-interest’ of the industry.” He then details how “Joseph F.  Cullman, III, Chairman of the Tobacco Institute Executive Committee, in a statement to the Senate in 1969, offered to discontinue cigarette ads in the broadcasting media,” (emphasis original). In other words, the Tobacco industry leveraged sentiment to achieve something that was well-within the scope of reason. Over time, these bans on cigarette advertisements expanded from broadcasting media to print such that one must almost try to find a cigarette advertisement. The tobacco industry and the ban on advertising provides a unique opportunity for us to discuss the entanglement of politics and business. While at the outset, we could rightfully be accused of glorifying “business” and demonizing “politics,” we would be remiss if we did not correct this interpretation. Note that this does not necessarily mean that these decisions are a surefire way for companies to increase profits. The rise of “woke capitalism” and other such calls to “humanize capitalism” presents a danger, not because “wokeness” itself is somehow dangerous or “bad,” but because its very logic can indeed lead to the prevention of its goals.8 If we presume that “being woke” is more costly than “not being woke” (a presumption that does not seem wholly unrealistic to us: if being woke were less costly, then every company would have a strong incentive to do so), then only the companies that are able to spread this increased cost among a large customer base will be in a position to continue. These companies are almost certainly the older, larger, more established companies, such as Apple or Google, and not smaller companies or start-ups, which must now incur the higher costs of competing not just on technological grounds but also on sentimental grounds. Thus, the commercial landscape could quickly become one very much dominated by larger corporations instead of one where innovative new companies are able to feasibly enter a market. This would be particularly problematic in a world where the business practices reflecting sentiment are required by law, as in the case of the tobacco industry’s ban on advertising and any bans on the means by which products are produced (e.g. international labor standards). Here, the purpose is not to advance the sort of “good” version of sentiment for-profit corporations may advance due to the desires of their customers, but rather as a means of keeping competitors at bay by increasing the cost of production and entry. Further, these are likely to be self-reinforcing, as the owners of corporations would surely support candidates who shared an affinity for sentimentalist justifications for legislation.

 See, for example, Powell (2014).

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Conclusion This chapter has presented some thoughts on why sentiment is likely to dominate within the realm of politics. The reason is not because elected officials are somehow more sentimental than their corporate analogs. Instead, the reason is because of the institutional setting within which elected officials find themselves operating within. This institutional setting is one that rewards viewing constitutional rules as roadblocks to progress. Like any roadblock, these must be surmounted or otherwise overcome for progress to be made and for the elected official to achieve their task. With the singular goal of getting (re)elected, policy makers have face powerful incentives to find ways around said roadblocks in order to gain, maintain, and when necessary, regain power in a Machiavellian sense. In a similar vein, once sentiment has taken root in politics, it is likely to spread to the for-profit corporate world for entangled political economy reasons. This is because the for-profit corporations likewise face a singular goal of generating profits. While an obvious way to generate profit is to find innovative production techniques, a second, and more nefarious way to do so is to partner with elected officials to create rules and regulations that stifle competition.

References Boettke, P., and S. King. 2021. James M. Buchanan on “The Relatively Absolute Absolutes” and “Truth Judgements” in Politics. Public Choice: 1–18. Brennan, G., and L. Lomasky. 1993. Democracy and Decision: The Pure Theory of Electoral Preference. Cambridge: Cambridge University Press. Buchanan, J. 1999. The Logical Foundations of Constitutional Liberty. vol 1 of The Collected Works of James Buchanan. Liberty Fund Press, Indianapolis, IN. Buchanan, J. 2001. Choice, Contract, and Constitutions. Indianapolis: Liberty Fund. Burnham, J. 1943. The Machiavellians Defenders of Freedom. New York: John Day. Buchanan, J., and R. Congleton. 2000. The Reason of Rules: Constitutional Political Economy. Indianapolis: Liberty Fund. Buchanan, J., and G.  Tullock. (1962). The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press. Chesterton, G. 1990. The Thing: Why I Am a Catholic. London: Sheed and Ward. Doron, G. 1979. Administrative Regulation of an Industry: The Cigarette Case. Public Administration Review 39 (2): 163–170. Friedman, M. (1970). A Friedman Doctrine – The Social Responsibility of Business Is to Increase Its Profits. The New York Times. Hebert, D. 2019. The Chairman’s Solution. The Journal of Public Finance and Public Choice 34 (1): 71–82. Hebert, D.J., and M.D. Curry. 2022. Optimal Lockdowns. Public Choice 193: 263–274. Hebert, D., and R.  Wagner. 2013. Fiscal Philosophers, Political Realists, and Tax Policy: Explanation, Exhortation, and the Choice of Analytical Windows. The Journal of Public Finance and Public Choice 31: 163–177. Leeson, P.T., and L. Rouanet. 2021. Externality and COVID-19. Southern Economic Journal 87: 1107–1118.

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Madison, J. 1966. Notes of Debates in the Federal Convention of 1787 Reported by James Madison. Athens: Ohio University Press. Martin, A. 2010. “Emergent Politics and the Power of Ideas.” Studies in Emergent Order. vol 3, pp. 212–245. Martin, A., and D. Thomas. 2013. Two-Tiered Political Entrepreneurship and the Congressional Committee System. Public Choice 154 (1/2): 21–37. Pareto, V. 1935. The Mind and Society. New York: Harcourt Brace. Powell, B. 2014. Out of Poverty: Sweatshops in the Global Economy. Cambridge: Cambridge University Press. Smith, A., and B.  Yandle. 2014. Bootleggers and Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics. Washington, DC: Cato Institute. Somin, I. 2013. Democracy and Political Ignorance: Why Smaller Government Is Smarter. Stanford University Press. Wagner, R. 2016. Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy. Northampton: Edward Elgar Publishing. Williams, W. 2005. The Entrepreneur as American Hero. Imprimis. September, 2009. Hillsdale: Hillsdale College Press. Yandle, Bruce. 1983. Bootleggers and Baptists: The Education of a Regulatory Economist. Regulation 7 (3): 12–16.

Economic Efficiency and the Quest for a More Just World Vlad Tarko

Introduction Historically, capitalism and democracy came as an ideological package deal, as the two key components, economic and political, of classical liberalism. The liberalism of the Scottish Enlightenment was in many ways a move against entrenched economic and political elites, and emphasized equality and the dignity of the average person. As Adam Smith argued in the Wealth of Nations, “[t]he difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education” (Book I, Chapter 2). On a practical, policy level, the economic critique of mercantilism and colonialism provided substantial grounds for skepticism toward the mix between political power and economic interests. But Smith’s most radical argument at the time concerned the nature of the wealth of nations itself, and not just its causes. Before Smith, the mercantilist pamphleteers in Britain or the physiocrats in France wrote from the perspective of a given interest group.1 The mercantilists wrote from the point of view of the king – whose favor they were trying to get. When mercantilists defended freeing some part of trade, they did so by arguing that their favored policy would increase king’s revenues. Sometimes, their preferred policies wouldn’t in fact benefit the king, and they would come up with elaborate attempts to obfuscate the truth. The physiocrats wrote from

 For a great collection of classic texts see Medema and Samuels (2013).

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V. Tarko (*) Department of Political Economy and Moral Science, University of Arizona, Tucson, AZ, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 M. Novak et al. (eds.), Realism, Ideology, and the Convulsions of Democracy, Studies in Public Choice 44, https://doi.org/10.1007/978-3-031-39458-4_8

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the perspective of agricultural interests. They were often at odds with the mercantilists because the interests of agricultural landowners were often at odds with those of merchants, rather than because of genuine disagreements about how the economy works. Merchants want low food prices and monopoly rights on their imports, agricultural interests want the opposite. As pointed out by Ekelund and Tollison (1982), mercantilists often had a sophisticated understanding of how the economy works (contrary to commonly held stereotypes about them), but they supported inefficient policies because they were not arguing from the point of view of general welfare. They were unabashedly partisan. Alongside his friend, philosopher David Hume, Adam Smith argued instead that the wealth of a nation should be understood from the point of view of everybody, rather than by privileging some specific interest group. Furthermore, when he was writing, most people were extremely poor, and, hence, a focus on general welfare was synonymous to being primarily concerned with identifying the policies and institutions that would most benefit the poor. This concern with the welfare of everyone, including the welfare of those generally marginalized, has remained at the core of economics, and the modern concept of efficiency is an attempt at a more rigorous formalization of this concern. Economic journalist Henry Hazlitt synthesized this point of view in a famous book called Economics in One Lesson. What is the one lesson? This: The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect is on one particular group; the good economist inquires also what the effect of the policy will be on all groups. (Hazlitt 1946, 4)

Does the modern concept of economic efficiency truly succeed at this impartial task? To the extent that it does, it also affects the proper role of the economist in society. Unlike the mercantilist pamphleteers, the modern economist is not supposed to be partisan. Lionel Robbins’ (1946) argued that economists cannot give policy advice from a privileged scientific perspective, but only as citizens, a claim adopted and emphasized by James Buchanan as well (James M. Buchanan 1959). According to Robbins’ and Buchanan’s arguments, the economist may have useful social scientific knowledge, but their policy advice should not be merely an attempt to promote their own personal values. Along similar lines, M. Friedman (1953) argued that economists should focus on informing the public because “differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action … rather than from fundamental differences in basic values, differences about which men can ultimately only fight.” Not everyone, however, agrees with Friedman’s optimistic outlook about the underlining cause of our policy disagreements. Fundamental differences in basic values may actually matter. Is Friedman correct though, that, in the presence of such fundamental value disagreements, fighting in the only option? Modern conflict theory and institutional economics actually point toward “no”. Even in the presence of fundamental conflicts, we can still find ways of organizing, relying on polycentricity and federalism, that minimize the need for fighting.

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The key question, though, remains what happens when different groups disagree because their interests and preferences collide? The optimistic Robbins-Friedman-­ Buchanan take on the root cause of public disagreements, and, hence, on the purely educational role of the economist, needs to be re-assessed. As political scientist Jack Knight put it, “the emphasis on collective benefits in theories of social institutions fails to capture crucial features of institutional development and change” because such explanations ignore “distributional effects of such institutions and the conflict inherent in those effects” (Knight 1992, 13–14) “Distributional effects” refer to the fact that different policy and institutional choices create different costs and benefits to different groups in society, and, hence, these groups are in conflict with each other (rather than “being in this together” and sharing common interests). Because different groups will benefit or suffer in different ways from the transition from one state of affairs to another, distributional effects are unavoidable. Can we still talk about efficiency, as a general normative criterion, despite this issue? While the Scottish Enlightenment emphasized primarily the benefits of social cooperation, the French Enlightenment, that grew around d’Holbach’s salon and Diederot’s Encyclopedie (Blom 2010), took a deeper look at social conflict. They added a suspicion toward religion, and especially state religion, concern for women and children’s rights, as well as for criminal justice reform, including a strong stance against torture. Cesare Beccaria’s treaty Of Crimes and Punishment was instrumental in the abolition of torture across Europe, and an early argument against the death penalty. Diederot took an even stronger and more radical position than Adam Smith or David Hume: Diderot thought the oppressed had every right to reclaim their sovereignty from their oppressors and from a society that sees people – be they subjects, wives, children, servants, or slaves  – as property of other people. Slaves are right to revolt against their ferocious masters, and medieval peasants had good reasons to kill their feudal lords. Wherever people are reduced to servitude by a lord, a magistrate, or a priest, tyrannicide becomes a morally acceptable means of reclaiming freedom from the powerful. (Blom 2010, 224–25)

The American and French Revolutions, and later the 1848 Revolutions, gave different instantiations to these ideas. By the nineteenth century, liberalism had become the main ideological driver behind the abolition of slavery and serfdom, and in favor of women’s rights. And, while Adam Smith’s and Diderot’s anti-colonialism became somewhat diluted in John Stuart Mill’s writings, the suspicion toward empire and war, and power in general, remained prominent. Furthermore, the national-liberal movement behind the 1848 Revolutions and beyond, brought in an additional powerful ideological force against European empires. In what follows I revisit the concept of economic efficiency, and the distinction between Kaldor-Hicks and Pareto efficiency, highlighting the problematic aspects of both. Pareto efficiency is often a dubious standard because it implies that perpetrators of gross injustice should benefit from the transition to a more just state of affairs, essentially implying that justice should always be held hostage by historical accident. Contrary to this point of view, we have Diderot’s position cited above. As a matter of fact, numerous historical improvements, like the abolition of slavery in United States or of serfdom in central and Eastern Europe, have been rather violent affairs.

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Moreover, we have commonly accepted situations when causing harm is considered fair game and requires no compensation, e.g. as in the case of rivalrous competition (firms competing for increased market share). As such, the key question is not how can we transform all Kaldor-Hicks improvements into Pareto improvements (by always compensating the losers), but which Kaldor-Hicks improvements should be turned into Pareto improvements and which shouldn’t? Providing an answer to this question is generally a source of great social conflict and disagreement. Many of our political disputes, e.g. about the size and nature of our safety nets, are disputes about how and how much should the various victims of creative destruction and economic disruption be compensated.

 he Strangeness and Subtlety of the Concept T of Economic Efficiency Efficiency, in the regular sense of the word, is the capacity to achieve a given goal with the fewest resources. A more fuel efficient car can drive further while consuming less gas. A more efficient light bulb creates light for a longer period of time, while consuming less electricity. Our agriculture has become more efficient in the sense that we’re producing more food while using less land and fewer farmers. In all these cases, the concept of efficiency is straightforward because we know what the purpose is, and the item we’re assessing is a means to that end. A car is a means of transportation, a light bulb is a means of illumination, agriculture is a means of making food. What about society? Can we really talk about the organization of society being more or less efficient? Does society have a purpose and are its institutions a means to that end? We can have many different performance criteria for evaluating an economic system, and, unfortunately, multiple criteria that all describe “good things” can be in tension with each other. For example, there appears to be a trade-off between growth and equality (Okun 1975) – advanced capitalist countries that have higher growth are more unequal, and those that are more equal have lower growth (Aligica and Tarko 2014). To make matters worse, different people take different stances on such conflicts and trade-offs. How can we talk about economic efficiency if people do not agree what the ultimate purpose of the system is? Can’t we just have a vote? Political scientists Achen and Bartels (2016) refer to this as the “folk theory of democracy”, according to which we can aggregate and centralize everyone’s individual preferences into a unique vision of the “common good” by means of voting. Unfortunately, there is no objective method of achieving this. One can organize a vote in many different ways, none of which is intrinsically better than the others, and different such voting methods will often lead to different outcomes. As pointed out by Arrow’s impossibility theorem, different, but equally legitimate and reasonable, voting systems will often generate different results

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(Arrow 1951; Riker 1982). It literally makes no sense to talk about the “common good” or “general welfare”, unless we keep it vague. The moment we try to operationalize it and turn it into concrete, policies, we are forced to face the impossibility theorem. Any specific policies will have winners and losers – and, hence, involve conflicts. But because there’s no objective way of aggregating preferences, we are forced to acknowledge that these conflicts will extend all the way to procedural and constitutional disputes about how to set up a vote in the first place. What is the best way of addressing this conundrum? The concept of economic efficiency is an attempt to expand the common-sense concept of efficiency in a way that takes the reality of fundamental disagreement seriously. This is in contrast to much of contemporary moral and political philosophy which tries to stipulate some sort of agreement between “reasonable people” about what constitutes a social improvement or a desirable social outcome. The problem with labelling those who disagree as “unreasonable” and, hence, deciding that their views can be ignored, is that it sets the stage for elaborate philosophical rationalizations for predetermined conclusions. In contrast to such attempts to dismiss unwelcomed points of view as “unreasonable”, the economic concept of efficiency attempts to genuinely take everyone’s views and interests into account. It is important to see to what extent economists actually succeed in this attempt. The point here is not to argue that economic efficiency is a meaningless concept, but to set up the problem in a way that fully acknowledges the fundamental difficulty, rather than taking the John Rawls easy way out of pretending agreement exists where in fact it does not, or the Milton Friedman way out of pretending that disagreements are solely due to poor information. The concept of economic efficiency is subtle and somewhat strange because it is deliberately defined in a way that avoids the impossibility theorem. We can still talk about economic efficiency, although society does not have any unique, identifiable purpose. We do not, and as a practical matter cannot, agree on the overall goal that our institutions should maximize. And, yet we can still talk about efficiency. Economic efficiency, as a normative concept, is the idea that everyone should get as much as possible of whatever they happen to want. In other words, instead of presupposing agreement, we define the concept taking disagreement for granted, and say “let’s see how we can satisfy as many of people as possible, as well as possible”. Although people disagree about the grand scheme of things, we can still try to get as many of them as possible to have as many of their subjective preferences satisfied as well as possible. This is a very different way of framing the problem than the typical approach in political philosophy. Political philosophers ask: (1) What outcomes are desirable (or “just”)? (2) How can we best get those outcomes, i.e. how should we organize society to be more “just”? By contrast, economists ask: (1) What do people want? (2) What’s the best way of organizing society to minimize the conflicts between those wants, such that as many of them can get what they want? (See also Schmidtz 2023 for a philosophical account along the similar economic way of thinking.)

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We can view the role of the economist as a facilitator for the discovery and implementation of such institutions. Similar to the Robbins-Buchanan view, the economists should not promote their own personal values under the guise of expertise. However, unlike the optimistic view of Friedman (as well as von Mises (1979), ch. 6), the role of the economist is not purely to inform the general public. A potentially better use of their skills is to facilitate the creation of new institutions by advising private firms (e.g. devising better auction systems or better structures for social media) and civil society groups (non-profits, coops, etc.). The role of the economist as advisor to political enterprises is always more problematic, because of the involuntary element of politics, but, at least in principle, the economist can help in similar ways as in the private or civil society sector. In addition to this negative side of the argument, according to which ideological diversity is a source of conflict and problems, I should also mention the important point made by philosopher Jerry Gaus about the benefits of ideological diversity. He referred to this as the “fundamental diversity insight”, which states that “Any given perspective Σ on justice … is apt to get caught at poor local minima; other perspectives can help by reinterpreting the problem or applying different predictive models, showing better alternatives in Σ’s neighborhood.” (Gaus 2016, 133). In other words, if we’re interested not just in a static picture, but in securing a long-term dynamic process of gradually building a better world, we should be suspicious of attempts to narrow down the realm of what constitutes acceptable and “reasonable” points of view. In the extreme, if we all accept a single vision of the “social welfare function” that needs to be maximized, we will not have the means of actually reaching the very top of this function (as we’ll probably get stuck in some local optimum). It is the interplay of different, incompatible, perspectives that helps us as a society reach greater heights from the point of view of most of these perspectives. I see this as an analytic version of the yin-yang first principle of Taoism: When everyone knows the truth, error is already here. When everyone knows what beauty is, ugliness is already here. When everyone knows what is good and just, evil is already here.

Pluralism and Egalitarianism As described above, economic efficiency tries to be a meta-value. Instead of adopting one privileged point of view, it is asking how we can have as many different points of view co-exist. Nonetheless, economic efficiency is not a truly morally-­ agnostic concept (Cowen 2013). Both Kaldor-Hicks and Pareto efficiency involve certain moral assumptions that not everyone accepts. The most important are: (a) value pluralism and (b) egalitarianism. The pluralism embedded in the concept of efficiency means that economists do not allow themselves to judge people’s preferences  – any preference is taken as given. This leads to some awkward pieces of analysis. For example, making it illegal to sell and consume drugs of any kind, or any attempt to prevent adults from

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“harming” themselves (as judged by others), is inefficient because it prevents some people from doing what they want (Landsburg 1993, ch 10). Needless to say, telling people that the main source of inefficiency in the War on Drugs is that it prevents drug addicts from indulging their vices is not exactly popular. It is though a consequence of the economic way of thinking and of taking the concept of economic efficiency seriously. Any kind of behavior involves costs and benefits, and people’s actions are assumed to reveal how they subjectively assess these costs and benefits. Any kind of paternalism, when some people’s value judgments and cost-benefit analyses are declared superior to others, is, in economic terms, inefficient. The egalitarian assumption is related to the pluralist one, and builds upon it. Not only are no preferences to be dismissed, but everyone’s preferences count the same. This applies to all people, regardless of political borders, cultures, etc. To put it differently, the agent doing a cost-benefit analysis is supposed to be an idealized utilitarian agent. To quote John Stuart Mill’s Utilitarianism: the utilitarian standard of what is right in conduct is not the agent’s own happiness, but that of all concerned. As between his own happiness and that of others, utilitarianism requires him to be as strictly impartial and disinterested and benevolent spectator.” (Mill 2015, 130). As it should be obvious, the concept of efficiency will sometimes lead to radical political positions, and, indeed, historically, economists have been strongly anti-­ colonialism and anti-slavery. The initial reason why economics was called the “dismal science” by Thomas Carlyle, was this insistence on egalitarianism and the abolitionist stance of people like Mill (Levy 2001). Perhaps the most radical consequence today is the presumption against borders and in favor a free migration (Caplan 2019).

Efficiency and the Problem of Evil The main objection to the economists’ way of framing this issue, as well as to Gaus’ emphasis on the benefits of diversity, is that some people are despicable and want despicable things (Tarko and Gangotena 2019). We shouldn’t try to satisfy their preferences, and we shouldn’t have to compromise to appease them. Hence, the argument goes, the Rawlsian attempt to identify who is “reasonable” is both unavoidable and desirable. Indeed, I don’t think that Gaus was actually able to escape this Rawlsian trap of trying to define who’s reasonable or not. You may notice the ellipsis in the quote given earlier. In the original text, Gaus introduces certain (quasi-arbitrary) restrictions as to which perspectives are acceptable or not. In my view, by doing so, he is basically giving the game away. The question is whether there’s any other way of responding to the objection about the existence of truly vile people and points of view. One of the main problems with the Rawlsian approach to “reasonableness” is that it is top-down, expert-driven. Is it possible to have an emergent version that does not depend on an arbitrary philosopher deciding the criteria for acceptance? In

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a previous paper, Santiago Gangotena and me have argued that this is, indeed, largely a non-issue because efficiency itself takes care of marginalizing despicable points of view (Tarko and Gangotena 2019). We can think of the efficiency of collective decision-making using the calculus of consent framework (James M. Buchanan and Tullock 1962). According to this framework, the efficient level of inclusion is determined by a trade-off between. External costs: the harms done to those excluded from the decision-making process or who disagree with the collective decision, but, nonetheless, are subject to it and have to obey it, and. Decision-making costs: the opportunity costs of trying to reach agreement (via rational debate and/or economic compensation) among a diverse group of people. The greater the level of inclusion (i.e. the closer to unanimity the collective decision needs to be), the greater the difficulty of actually reaching agreement. Given that time is valuable, spending too much time trying to reach agreement may not be worth it. However, a greater level of inclusion lowers the harms of the collective decision – the interests and views of more people end up being taken into account. Consequently, under certain conditions, it may be efficient to have a more inclusive collective decision-making process, while under other conditions it is efficient to exclude certain people and certain points of view. Which points of view are excluded? Those that most increase the difficulty of reaching agreement. Consequently, we don’t need to decide who is “reasonable” by means of some general philosophical theory – this is something that emerges naturally as people try to reach various collective decisions. The unreasonable tag themselves, so to speak, by making it harder to have them in the group. It is, of course, possible, and occasionally does happen, that some weird minority is actually correct (and, hence, unjustifiably excluded by the above process), but it is up to that group to convince the majority that it is actually worth it for them to deal with the harder decision-making. This minority is making it harder for the collective to operate, and, as such, the temptation is to just “be more efficient” by excluding them. However, the group might succeed in convincing a sufficient number of people that they are bringing attention to certain considerable (and currently ignored) social harms. This is, indeed, how social advocacy usually operates. For example, the abolitionist movement started as a weird minority, but succeeded partly because they were able to convince a lot of people that slavery was creating very large social harms that the existing economic and political status quo at the time was ignoring. By contrast, genuinely despicable minority groups are not able to make similar points about ignored social harms. The calculus of consent thus has a bias in favor of more just social orders, in which by “just” here we mean states of affairs in which there is less suffering. The process described here is, thus, not entirely morally relativistic, although it does not depend on top-down moralizing by supposed philosophical experts. This calculus of consent process of inclusion and exclusion incorporates an account of both bottom-up social progress via advocacy, and the justified marginalization of despicable groups.

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Kaldor-Hicks and Pareto Efficiency Revisited A commonly held view is that Pareto efficiency (PE) is the gold standard of evaluation, while Kaldor-Hicks efficiency (KHE) drives its legitimacy primarily from the fact that, at least in principle, KHE can be transformed into PE via transfers. The typical argument goes like this: Eliminating tariffs may harm some domestic producers and their employees, but the benefits to other people outweight their costs (KHE criterion). As such, we can tax everyone who benefits from the removal of the tariff and compensate those who suffer the costs. As a result of such a transfer, everyone would benefit from the removal of the tariff. KHE thus turns into PE. In practice, however, the transaction costs may be too large – it may be too costly to determine who exactly suffers and who benefits, how much each person gains or loses, how to prevent lying, how to set up the bureaucracy that implements the transfer, etc. These transaction costs may well be so large that it is no longer possible to transform KHE into PE. Nonetheless, because, in a zero transaction costs world, such a transformation would presumably be possible, it still remains the case that the social benefits of removing the tariff outweight the social costs. I want to challenge the idea that PE is more legitimate than KHE. The problems with PE can be easily seen with the help of a few examples. Consider first the case of Nicolae Ceausescu’s communist dictatorship. Removing him has arguably led to a substantial Kaldor-Hicks improvement for Romania’s population. This being said, the transition has not been a Pareto improvement. Apart from the hundreds of people who died in the Revolution (who maybe preferred death to the continuation of the communist regime), Nicolae Ceausescu and his wife were executed, numerous former members of the nomenklatura lost their positions and privileges, and also numerous regular people lost their secure, if poorly paid, jobs in the transition process of reallocation of capital and labor (Tarko 2020). The PE criterion holds that a better transition would have been to bribe the ruling elites such that they would voluntarily give up power. In this case, it seems that the PE criterion gets its legitimacy from the KHE criterion and not vice-versa. The peaceful, “bribe the ruling elites”, solution is acceptable as a pragmatic compromise, but not as a first-best solution. For instance, maybe if the Ceausescus would’ve been (could’ve been) successfully bribed to give up power and retire somewhere comfortably, those hundreds of people wouldn’t have had to die during the Revolution. Notice that this argument does not claim that the KHE solution is inferior because we also need to take into account Ceausescus’ and nomenklatura’s interests. When the status quo is profoundly unjust and specific people are benefiting from the exploitation of others, it is odd to claim that justice requires us to compensate the exploiters. At best, the compensation here is a facilitator for the transition – a method of enabling the switch from one equilibrium to another (Boettke and Coyne 2007). One of the most dramatic cases along these lines was the abolition of slavery in the British Empire via buying the slaves. The slavers were, hence, (partially)

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compensated for their losses. This was clearly closer to PE than the American Civil War method of abolishing slavery. But notice that the British solution was not adopted as a first-best approach to justice, but out of pragmatic considerations – it was a way of facilitating a quicker and cheaper transition to a more just society. Even if one is willing to defend alternative hypothetical scenarios in which US slavery would’ve been (and could’ve been) abolished via some compensatory process, it is still the case that the argument remains a KHE argument. Aside from the two world wars, the American Civil War was one of the most destructive wars in human history. As such, it is not crazy to try to think about ways in which the destruction could’ve been minimized. But this does not turn the argument into a PE argument. The argument is not “how about the slavers’ interests?”, it is “how could the ‘good guys’ have won cheaper?” We can think of this as an example in which the British (partially) transformed a Kaldor-Hicks efficiency improvement into a Pareto improvement (even slave owners benefitted from the abolition of slavery thanks to being financially compensated), while the US did not. This highlights the tension between Pareto efficiency and justice. However, the situation is more complicated, as, after their Civil War defeat, the pro-slavery interests did not just go away. They maintained a strong political position, leading to racial segregation and other numerous racial problems far into the twentieth century, and maybe lingering to the present day. Despite winning the Civil War, the pro-freedom forces in United States did not in fact have the capacity to fully defeat their enemy, and had to go along with various forms of appeasement. In other words, there was a partial transformation of KHE into (in this case, unjust) PE. Based on such examples, one can see KHE as more in-sync with consideration of justice than PE.  Unfortunately, KHE is not without issues. Kaldor-Hicks efficiency requires us to compare the benefits of one person to the losses of another. Given that these benefits and losses are subjective (they reflect their preferences), it is quite difficult (perhaps even impossible) to make a truly objective assessment. In practice, we do such comparisons all the time, but, if we want to be theoretically rigorous, this is quite problematic. If costs and benefits cannot be compared, we can’t even be certain that a transition from one state of affairs to another indeed passes the cost-benefit test. This means that the KHE standard can become a tool for rationalizing exploitation – pretending that a certain policy passes the cost-benefit test, while in fact it benefits a small group at the expense of everyone else – in other words, a return to the mercantilist pamphleteers’ attempts to obfuscate the truth. Pareto efficiency does not have this issue – indeed it is defined that way precisely to avoid both the problem of value pluralism and the problem of inter-personal comparisons. If no one gets harmed, we don’t have the issue of trying to estimate the size of the harm relative to the size of the benefit. Another type of example of the normative priority of Kaldor-Hicks over Pareto efficiency involves not so much injustice, but instances of widely accepted zero-­ sum competitive games. Perhaps the most important such case is that of rivalrous competition (as in the Bertrand model of imperfect competition). The social costs associated with such a process can be quite large, and, yet, it would be odd to

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propose that the winners compensate the losers – this would imply that more efficient firms should subsidize less efficient ones. A typical example of such “economic disruption” is the failure of Kodak. In the early 1990s, in the final days of film photography, Kodak had a market share over 80% in United States, and employed about 145,000 people. In January 2012 it filled for bankruptcy, and today the company has fewer than 5000 employees. What happened? The company was unable to adapt to the arrival of digital photography. The customers and Kodak’s competitors obviously greatly benefited from this transition. The cost of photography went down and everyone was finally able to photograph their every meal. The miracle of Instagram and Tik Tok was finally within reach. But this happened at the expense of Kodak, its employees, and its investors. This was not a negligible negative externality, and, yet, as far as I know, no one would argue that Kodak’s competitors should’ve compensated Kodak for the harm they’ve suffered. This was fair game and Kodak lost. More than a hundred thousand people had to adjust and find a different form of employment, and investors holding Kodak shares had to swallow large financial losses. This example showcases an important point: We live under certain norms and expectations about what kind of negative externalities are in some sense illegitimate and require compensation (or should be regulated). For instance, a negative externality like pollution is not fair game, but gaining market share at the expense of a competitor is, even if the social costs of some pollution might be substantially lower than the social costs of economic disruption. The fact that creative destruction is an unavoidable part of entrepreneurial capitalism, Schumpeter (1942) would say it is the defining feature of the system, implies a world of uncertainty in which people can suffer great harms at no fault of their own, which will, nonetheless, be considered fair game. The social costs of trying to make the world less unpredictable by restricting creative destruction, e.g. by means of expanding the range of the precautionary principle, would be even larger (Thierer 2016). But, notice that we’re talking in terms of a cost-benefit analysis in which we say that the benefits for the most outweigh the occasional harms to some – a Kaldor-­ Hicks improvement that should not be turned into a Pareto improvement because attempting to do so could kill the goose that lays the golden eggs.

Efficiency Versus Justice George Stigler (1992) famously argued that every durable social institution or practice is efficient, or it would not persist over time. New and experimental institutions or practices will rise to challenge the existing systems. Often the new challenges will prove to be inefficient or even counterproductive, but occasionally they will succeed in replacing the older system. Tested institutions and practices found wanting will not survive in a world of rational people. To believe the opposite is to assume that the goals are not desirable: who would defend a costly practice that produces nothing? So I would argue that all durable social institutions, including common and statute laws, must be efficient.

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This is efficiency as a purely descriptive concept. According to this approach, economic efficiency is the claim that, given our constraints (technological, political, and otherwise), everyone is in fact always getting as much as possible of what they want. This is a useful concept if we want to explain why things are as they are and why they change in a particular direction, while dismissing randomness as the predominant reason. To build such an explanation we need something that gets maximized, and which will serve as the main explanatory tool. In the same way as biologists would say that life forms exist and are as they are because they maximize their genetic inclusive fitness, so would economists say that institutions exist and are as they are because they maximize economic efficiency within the existing constraints (see also Leeson 2020). Stigler (1992) makes the important point that economic efficiency should not be confused with maximizing money. Economic efficiency refers to maximizing preference satisfaction, and people have a wider set of preferences than just money. In particular, they have preferences over how society itself should be. Measuring efficiency by means of incomes makes sense to the extent that we’re only concerned with private goods that can be acquired by means of buying and selling. Indeed, this is the reason why we’re often looking at GDP per capita estimates of the average income in a given country. Looking at the average income is a good way of avoiding to take a stance about what people should desire – a higher income indicates a greater capacity to obtain whatever one’s preferences might be, but, again, only as long as those preferences can be satisfied by buying various goods or services. Economic efficiency, however, is a broader concept, which also includes preferences over collective goods. Because people want those collective goods, they will take various actions, including engaging in conflict, to satisfy those preferences. As such, if certain institutions survive for a long time, this means that people either like those institutions or they lack the capacity to change them. People tend to get the best institutions they can get, given their constraints. Stigler draws a sharp distinction between efficiency and justice. As an example, you can think of slavery as one of those “durable social institutions”, and, hence, efficient, in the sense that those willing to change it did not have the resources to pay the costs of transition, thus leading to the persistence of the institution. As such, the position that everything is efficient is only apparently Panglossian – it is not a claim that everything is good or just, on the contrary, it provides an explanation for why unjust institutions can persist. The world is not just, it is quasi-Pareto efficient. Pareto efficiency is a useful concept for understanding the key difficulties in changing the world toward a potentially more just state of affairs, because it draws our attention to the need to address the forces that oppose change (one way or another, by persuasion, compensation, violence or some combination of the three). Stigler says that economists, as social scientists trying to understand how and why the world is as it is, need to focus on efficiency (as a descriptive tool of analysis), while justice is the concern of legal scholars and philosophers. To summarize: To the extent that we want to use efficiency normatively, we should use Kaldor-Hicks efficiency, rather than Pareto. By contrast, to the extent

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that we’re interested primarily in positive explanation and description, Pareto efficiency is one of our most important tools of institutional analysis, more so than Kaldor-Hicks. Nonetheless, Pareto efficiency still has a limited explanatory power because people also engage in conflict and violence as a means to getting what they want. Pareto efficiency can help us identify the stumbling blocks to change, but it doesn’t tell us whether those stumbling blocks will be overcome by bribery or violence.

Federalism and Polycentricity There is a relatively simple connection between conflict minimization and efficiency understood in a materialistic sense of maximizing output. In one of the earlier economic theories of conflict, Gordon Tullock noted that situations of conflict are inherently inefficient: they “lead to investment of resources by A to get B’s property and by A to defend it. Regardless of the outcome of the conflict, the use of resources for this purpose is offsetting and therefore inherently wasteful”. Consequently, “[s]ocial contrivances for reducing such investment are, on the whole, desirable, although there may be cases where it is more efficient to place no institutional restrictions on such conflict.” (Tullock 2005, 5). The key to avoiding many conflicts is to try to enable everyone to have their wishes satisfied, as much as possible, and this is generally done by thinking about the system of rules that governs our interactions, rather than about what each of us should do. As philosopher David Schmidtz writes, “the truth that manages traffic well, is not the truth about who has the superior destination” (Schmidtz 2023, 16). “When disagreements are inevitable, the political ideal is to make disagreements non-threatening – to make it safe to disagree. The adult political ideal is not to avoid losing so much as to avoid needing to win.” (Schmidtz 2023, 19). Social psychologist Steven Pinker (2011, 2018) wrote two books documenting the various ways in which humanity has become less violent and life has become overall more pleasant. Given the connection between the discovery of institutions that minimize conflict and the increase in output, we should not be surprised by these trends. If institutions indeed tend to become more efficient, because societies that discover and implement “social contrivances” for avoiding waste outcompete societies that don’t, we should expect an overall trend toward less conflict. Institutions that limit conflict and/or solve conflicts quicker should spread. What is the end state of affairs that we can expect from this process? It is tempting to assume that it will be some type of anarchy: a system of purely voluntary interactions and self-governance. Any institutional innovation that enables more voluntary modes of interactions will reduce the cost associated with conflicts, and, hence, will be more efficient. In the long-term, the more voluntary societies will tend to outcompete the more autoritarians ones, as, indeed the trend identified by Pinker seems to be. This doesn’t mean, however, that we currently know how these hypothetical end-of-history anarchic societies will be organized. Neither

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anarcho-­capitalism (Rothbard 1973; D. D. Friedman 1973) nor socialist anarchism (Crowder 1992) are very convincing institutional constructions. The point here is that the transition toward more efficient orders requires political and civic entrepreneurship, i.e. it requires making difficult and non-obvious discoveries, discoveries that we are yet to make. There is a reason, however, to doubt that the end state of affairs will be full-­ blown anarchy. To see this, consider an analogy between institutional competition and market competition. The argument from the previous paragraph is a perfect competition argument, which may seem plausible for a long-term account. An important point, however, made by Schumpeter (1942) is that the most economically efficient form of competition is not perfect competition. Under perfect competition prices go down to marginal costs, hence, leaving no resources for research and development (R&D). Perfect competition is statically efficient, but not dynamically efficient – to maximize output over the long-term, firms need to have some profit surpluses available for re-investment and R&D.  In other words, from a dynamic perspective, it is efficient to have firms with a certain degree of market power. Not monopolies, of course, but not fully competitive either. Building on this analogy, the Schumpeterian argument implies that it is also efficient to have governments with a certain degree of “market” power. Again, not monopolies, and, hence, maybe no longer fitting Weber’s definition of a “government”, but not purely competitive either.2 A purely competitive government (also known as a voluntary club), i.e. a government from which exit would be essentially costless, would be forced to gather only the minimal amount of taxes and deliver all public services at cost, leaving no resources for public sector innovation. The clubs facing an overly competitive environment would end up outcompeted, leaving an equilibrium state of affairs in which the clubs/governments retain some power. As should go without saying, I’m not arguing that existing governments are already in their ideal, most efficient form. But this Schumpeterian argument does imply that the end state of affairs is likely to be some type of federal/polycentric system in which different governments/clubs keep a certain degree of power, but also experience substantial overlaps, and the costs of exit (for both businesses and people) are relatively small (but nowhere near zero) (Ostrom 1972, 1991; Bish 1999; Wagner 2005). As noted by Richard Wagner (2014), American federalism appears to be moving in the wrong direction, both from the point of view of efficiency and from the point of view of democratic representation. The main cause is rent-seeking and the capture of both government and the public administration apparatus by special interests. This goes hand in hand with over-centralization, as the gains from extraction are larger (and more monopolistic) if the scale of government is increased. How far can this go, and what are the forces going against it? The Stiglerian perspective on efficiency urges us to focus on constraints rather than on what different groups want. Wagner’s and, earlier, Buchanan’s points about

 I would argue that very few, if any, governments ever fitted Weber’s definition anyway.

2

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the scalability of government are useful to map out some of these critical constraints. The administrative apparatus necessary for governing a group of people does not increase linearly with the governed population, because the increase in population expands the possible connections between people exponentially. Governing is about managing an ever-changing network of people, not just the number of people. As such, technology, especially communication and transportation, has been the critical factor that enabled the growth of government over the past hundred years. Ironically, however, the same technological developments that have, in the past, made the expansion of the scale of government possible, are now making governing at scale harder. In the relatively recent past, mass-media (with a relatively limited offer of television programs and few prominent newspapers) has created the perception (illusion?) of a common public opinion. This has been one of the key enablers of centralization, by creating large scale consensus about what the problems were and what the few possible solutions might be. By contrast, the internet has given rise to an explosion of free expression and has severely fragmented the public sphere. In the process, it has hampered the capacity for centralized government. Similarly, the decline in transportation costs has, first, enabled governing at larger scales. But the further decline in transportation costs, combined with liberal globalization policies, has enhanced jurisdictional competition, both for capital and for people. Again, the same factor that in the past has led to centralization is now making centralized government harder, while expanding the overall influence of large-scale private firms. The improved communication and transportation has effectively increased the number of possible connections, hence making governing harder.

Quadratic Auctions Suppose that governments should indeed be part of a federal/polycentric structure. This still leaves open the question: How should individual governments be organized? We have all heard Churchill’s saying: “Democracy is the worst system, except all the others.” But is this really true? For instance, Burnheim (2006) argues that using randomness instead of elections could improve the system considerably – suppose that we would select senators and representatives in the same way as we currently select jurors, i.e. picking them at random out of a set of eligible citizens. Such a system would be substantially more representative than electoral democracy, and probably less prone to rent-seeking or campaign finance issues. But, setting aside such ideas, I want to expand here on the topic of efficiency, and briefly explore the fact that it is possible to minimize conflicts involved in collective action by using auctions instead of elections, and using the proceeds to compensate the losers. As mentioned before, Kaldor-Hicks efficiency has some significant technical issues. Most importantly, how does it overcome the problem of inter-personal

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comparisons of utility? The rigorous answer is that it doesn’t. In practice, however, a common approach is to look at the willingness to pay as a proxy for subjective utility. A person who wants X more, would be willing to pay more to get it, ceteris paribus. For example, suppose the government wants to allocate the right to use radio frequencies in the most efficient fashion. The simplest method is to have an auction (Coase 1959). Those willing to pay the most for the ownership of that radio frequency are those who, all else constant, value it the most, and are able to put it to the best economic use. Of course, all else is not usually equal. A common and obvious objection to the willingness to pay approximation is that it does not consider the capacity to pay. This approach to revealing preferences would undervalue the preferences of the poor and overvalue the preferences of the rich. There is a large field of study in economics called “mechanism design” which tries to find various ingenious ways of accurately revealing people’s preferences, for example avoiding the problem of strategic lying. Let me mention here only one simple idea from this literature, designed to alleviate, among other things, the capacity to pay problem. This is known as “quadratic voting” (Posner and Weyl 2018, 105–26). Suppose that instead of assuming a one-to-one proportional connection between the amount of dollars paid and the strength of one’s preference, we assume a quadratic relation: When you pay $x, you receive a number of tokens equal to 10 x (Table 1). We then do a regular auction but with the tokens instead of the dollars. What this achieves is dampening the effects on inequality. A $10,000 income ratio between two people translates into an only 100 tokens ratio between them, while the overall rankings in the strengths of preferences are still maintained – a stronger preference translates into more tokens, just as it would translate into more dollars. This idea of quadratic voting (which is more accurately called quadratic auctioning) is generally discussed in the context of collective decision making, as a replacement of standard voting. Standard voting has a huge problem from the point of view of efficiency (Pareto or Kaldor-Hicks). Any vote would involve a group of people who lose the vote. Those people presumably suffer a cost as a result that they have to live under a regime (or with a collective decision) with which they disagree. If you vote for candidate X and Y wins instead, you are probably upset. Notice that voting has no possibility of compensating the losers along the lines discussed earlier. As such, unless we have unanimity, voting cannot be Pareto efficient. To make matters worse, voting isn’t even necessarily Kaldor-Hicks efficient. This is because everyone has only one Table 1  Quadratic voting

Pay $1 $4 $100 $900 $10,000

Tokens 10 20 100 300 1000

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vote, but different people may care about the issue differently. Auctions are designed to avoid precisely this problem. To summarize, normal auctions have a fairness problem (capacity to pay may interfere with the willingness to pay), while regular voting has an efficiency problem. Quadratic voting (auctioning) alleviates the fairness problem of typical auctions while maintaining the ability to address efficiency. Suppose that instead of having a vote, we have a quadratic auction. Each person pays a certain amount of money (to support their preferred candidate), which is then translated into a corresponding amount of tokens, and the candidate that gets the largest total amount of tokens wins. Because we’re counting tokens, rather than money, the unfair bias created by the capacity to pay is significantly curtailed. Furthermore, the total amount of money paid by the winners is then distributed back to the losers of the vote. As such, you may lose the quadratic vote, but receive in return some financial compensation. The amount of tokens you have paid presumably matches the strength of your preferences (it is a way for you to reveal how much you care), and, as such, the total amount of money paid by the winners (which is now distributed back to the losers) will be more than the cost suffered by the losers. This procedure might not be perfectly Pareto efficiency, but it would approximate Pareto efficiency.3 Quadratic voting is a fairly new idea, and, as such, it is not yet widely adopted, although it has rightly received quite a bit of attention, including from some crypto-­ currency applications on the Ethereum blockchain. Research shows that democracy responds primarily to the views of rich people (Gilens and Page 2014), partially because poor people are less likely to have the time to be politically active and partially because of the bias induced by lobbying. Quadratic voting, by partially de-biasing the auction mechanism from the effects of income, offers a possibility for better discovering what best serves the poor even for collective matters.

Conclusion Political scientist Francis Fukuyama (1992) has (in)famously argued that liberal democracy, i.e. the combination between capitalism and constitutional democracy, is “the end of history”. By this he did not mean that historical events will no longer happen, but that, as far as normative matters are concerned, we have reached the

 One can think of different ways to distribute the consolation prizes to the losers. It may seem that the best way is to distribute to each person an amount proportional to how many tokens they’ve spent. This would indeed lead to a Pareto efficient outcome if we could be sure that no strategic bidding happened  – i.e. that everyone bid honestly in proportion to their actual preferences. Considering that such strategic bidding cannot be taken off the table, it’s probably a better idea to distribute back equal amounts to all the losers. This will lead to a Kaldor-Hicks efficient outcome that is closer to the Pareto efficient outcome, although not entirely Pareto. 3

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pinnacle of political organization – liberal democracy is the best possible system. To the extent that the world would move away from liberal democracy, it would move in the wrong direction. Fukuyama’s claim about “the end of history” is often ridiculed by people who misunderstand it, and who, more often than not, actually agree with it. Part of the purpose of this essay was to suggest that our current version of liberal democracy may not actually be the best possible system imaginable. I hesitate to go down the route chosen by Rothbard (1973) or D. D. Friedman (1973), and try to imagine what actual institutions we will have at the end of history, as I believe that whatever the future will hold depends on substantial additional institutional and technological innovation. As Adam Martin (2019) has noted, “good boundaries need to be discovered”. Polycentric federalism (of overlapping, rather than clearly separated, jurisdictions) and quadratic auctions are two examples of what Martin calls the “exit-tilt” and the “consensus-tilt” impulses in liberal theorizing, and are just two examples of how public governance could reform in the direction of greater efficiency. The other purpose of this essay was to try to clarify the relationship between Pareto, Kaldor-Hicks efficiency and questions morality and justice. Contrary to many accounts, I argued that Pareto efficiency is a poor normative criterion, while, nonetheless, offering a valuable tool for institutional analysis. Pareto efficiency is important not because it tells us what we should do, but because it tells us why injustice persists and reform is often difficult. Kaldor-Hicks efficiency provides a better normative guideline, despite its known problems in terms of inter-personal utility comparisons. Using it as a guide, we can see why (a) we should protect federalism and further build a polycentric order in which the movement of capital and people is easier; (b) why pure anarchy is probably not the ideal; and (c) why we should use auctions more and electoral democracy less.

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