PURE AUTOCRACY AND PURE DEMOCRACY

Hoppe (Reference Hoppe2001) argues that monarchy is a more preferable form of government than democracy. According to this argument, since the king owns the country, he has an incentive to engage in responsible stewardship of the realm. Olson (Reference Olson1993) correctly realizes there is a profound flaw in this argument: While it is true that the king-owner has some incentive to care for his property, and thus the country, the incentives between private and social wealth maximization may still diverge. A king-owner will invest in his country, provide public goods, etc., to the extent that the marginal private benefit exceeds the marginal private cost. However, the king has little incentive to care about any divergence between marginal social benefits and marginal social costs, aside from the effect of this divergence on the chances of his being deposed. Alternatively, a king-owner, as a rent-maximizing autocrat (e.g., Tullock Reference Tullock2005b), has incentives to treat the country as an income-yielding investment. Among other things, the private income stream the country provides depends on the tax rate set by the autocrat. The autocrat's incentives are such that he maximizes private payoff by picking the revenue-maximizing tax rate. Economic theory suggests that the autocrat faces a tradeoff between tax revenue and wealth destroyed due to the tax, and so he sets the tax rate such that the marginal unit of revenue equals the marginal unit of deadweight loss. This is not a social optimum: the tax rate that maximizes the autocrat's private wealth is almost certainly higher than the tax rate that would maximize the wealth of the rest of society. It is this divergence that shows the incentive-aligning features of private ownership are, by themselves, insufficient to prevent a territorial monopolist from engaging in privately beneficial but socially costly acts (Leeson Reference Leeson2007).

This narrative is the foundation for Olson's (Reference Olson1993) support of democracy. In Olson's model, since voters earn income from both the market and from public revenue disbursements, they internalize the wealth destruction created by taxation. A politician competing for voters’ support would thus be forced to choose policies such that the marginal unit of public revenue going to the representative voter equals the marginal loss in market income due to the tax scheme needed to raise public revenue. This mechanism allows the polity to enjoy a nonpredatory tax regime, which improves welfare for all. However, this argument too has several problems. Olson assumes the interests of voters are adequately aligned with social wealth maximization, but beyond a very small proportion of the polity's population, this is almost certainly not true. The representative voter, in a large election, knows his vote is unlikely to be decisive. Therefore there is little cost to him for abstaining, or to voting for policies that are economically inefficient as a signal of altruism, which may raise the voter's social status in the eyes of his peers. Furthermore, there is little incentive for the representative voter to acquire information concerning the candidates, both in terms of their proposed policies and their effect on the polity. Information is a good that is costly to acquire, just like any other good; to the extent that voters value information on candidates and candidates’ platforms as an input to making sound electoral decisions, the fact that the representative voter rightly expects to have no effect on the election outcome discourages him from acquiring information in the first place. Of course, politicians recognize this, and rationally respond by playing “concentrated benefits, dispersed costs” strategies that gain them the support of well-organized and well-informed interest groups. Since the cost of these policies, which are a form of rent-seeking, to poorly organized and poorly informed ordinary citizens is minimal, it is privately beneficial to politicians, but socially costly.

These insights, long appreciated by public choice scholars, suggest Olson's rosy picture of democracy is the result of comparing actually existing autocracy to ideal democracy, which is hardly the relevant counterfactual. Both pure autocracy and pure democracy are characterized by significant defects as a result of the rational choice calculus of those in a position to influence policy. Of course, whether pure autocracy or pure democracy entails larger social wealth destruction is an empirical question. But it is not a very interesting one, because history offers us no examples of pure autocracy and pure democracy, and few that approach them in the limit. Both in highly democratic and highly authoritarian polities, there are elements of the other governance form embedded in the polity's constitution, whether formal or informal. Nations that are frequently portrayed as practicing “direct democracy,” such as Switzerland, also frequently have a federal system with representative government at both the local and national levels. Direct democracy in these cases is usually embodied in the public's option to force referenda on ordinary legislation and constitutional amendments. Strongmen in a dictatorial position, such as exists in several sub-Saharan African countries, frequently make use of an advisory council of close confidants, and must take cognizance of the informal power structure upon which their rule is based. “The dictator continuously lives under the Sword of Damocles and equally continuously worries about the thickness of the thread” (Tullock Reference Tullock2005b, 292). But pure democracy's and pure autocracy's lack of historical realism does not prevent these models from being useful in our study of actually existing governance institutions. As an illustration, in economic theory, the model of perfect competition is empirically inaccurate, but it is an indispensable tool for studying actual market processes. This is because juxtaposition of the model with the real world highlights precisely which features of the real world are interesting, and helps ameliorate the market frictions which are absent from the perfect competition model by assumption. It is the same with the above stylized models of governance: The absence of real-world examples help us discover how the division of authority between the strongman and the council, usually embodied in modern political institutions in the separation between executive and legislative decision-making, helps ameliorate the frictions in political processes.

BARGAINING OVER POLITICAL PROPERTY RIGHTS

With these stylized models in mind, we can better understand the work done on the historical evolution of the distribution of political authority between an executive and a council of elites. Congleton's (Reference Congleton2011) account is invaluable because it explores these issues in economic terms. Political power, in the form of the distribution of decision-making capability, results from executives (historically, a king) and councils (historically, nobles) bargaining over governance rights. From these distributions Congleton infers a generalizable “King and Council” or “King in Parliament” framework. The result is a classification, during the rise of Western liberal democracy from the feudal order, of who has what power, and how that power can be explained by a rational choice framework. The end product is a partial endogenization of constitutions.

Of particular interest is the model of taxation rights between the king and the advisory council (Congleton Reference Congleton2011, Chaps. 5 and 6). In brief, this model assumes the king initially has the power to tax unconditionally. The king's ideal strategy would be to convince his subjects that taxes will be low and stable, to incentivize a high level of production. But this would change the king's strategy after his subjects have produced many goods and services; predation, in the form of a higher-than-promised tax rate, is now preferable. Subjects recognize the king's promise is incredible, and so produce at near subsistence, leaving little to nothing for the king to tax. This sets up the possibility of a mutually beneficial exchange in authority between the king and his council. Initially, the council's role is purely advisory, with no formal power. But the king can bargain with the council to grant them the right of veto to the king's tax plan. The increased political power is obviously desirable to the council, as a protection against arbitrary taxation by the king. The decreased political power too is beneficial for the king, since it allows him to credibly commit to lower and more predictable tax rates. Subjects respond by producing more, which benefits the king, because he is getting more revenue at the lower and predictable rate, since the expansion of the tax base more than makes up for the lower tax rate. All parties are better off under this scenario, even though subjects had no say in the bargain, to which only the king and nobles were party.

Interestingly, the course of bargaining can run both ways in the model. If bargains between a powerful king and a weak council, yielding a moderately powerful king and council, can be welfare enhancing for all parties, so can bargaining between a powerful council and weak king, yielding the same result. Only the distribution of governance rights between the king and council, and hence private surplus, will be affected. Of course, the interesting implications of this breakdown of political rights arise in the real world, where impediments to exchange and historical path dependencies make it very important who begins with what rights. Time, through which action takes place, is irreversible (O’Driscoll and Rizzo Reference O’Driscoll and Rizzo2002 [1985]), so the distinction between ex ante and ex post is analytically significant. If the most recent bargains among elites have resulted in negative consequences for social wealth and welfare, reversing course may not be desirable, let alone feasible. Nonetheless, if I want to establish that claims to governance revenues in the form of political property rights is, to some degree, desirable for social wealth maximization, then I must confront the implications of Congleton's narrative, which throughout has a noticeable Whig undercurrent.Footnote ² Congleton (Reference Congleton2011, 606–7) admits his positive narrative of gradual constitutional refinement fits well with Whig notions of history. Is there any reason to suspect that any subset of the Western constitutional bargains may not have had beneficial consequences?

I believe there is, and the key lies in further specifying the nature of political property rights. Political property rights always exist, de facto or de jure, but the form they take has changed significantly. In the medieval order, political property rights stemmed from, and were bundled with, economic property rights. Kings and nobles based their right to govern on their ownership of the realm. In modern liberal democracies, political property rights are rarely formally defined, but instead depend on the balance of interests and power between elected officials, interest groups, and the bureaucracy. Which actor has the authority to control which cash flow rights in the political process is institutionally contingent and often is unclear even to public officials, since control over the cash flow stemming from the fiscal commons emerges out of complex political bargains, and is not an object of direct choice (Wagner Reference Wagner2007; Reference Wagner2012b; Reference Wagner2014).

SPECIFYING PROPERTY RIGHTS IN THE CORPORATE POLITY

In the “shareholder state” paradigm, the state is conceived as a peculiar type of corporation (e.g., Salter and Hall Reference Salter and Hall2014). This is more a classificatory model than one used to drive the generation of predictions, similar to Congleton's (Reference Congleton2011) classification of various governance schemes as points along the “King and Council” spectrum. As in more familiar joint-stock corporations, the state has shareholders. These shareholders are the claimants to the profit generated from the state's activities, which is “governance,” broadly conceived. In the medieval order, these were largely kings and nobles, but also included clergy and trade guilds. These rights were often explicitly defined and enshrined in documents, such as charters, that resulted from bargaining between the various shareholders. The result of these bargains was the polycentric legal order that characterized medieval Christendom (e.g., Anderson Reference Anderson1991; Baechler Reference Baechler and Cooper1975; Benson Reference Benson1990; Berman Reference Berman1983; Raico Reference Raico and Boettke1994; Stark Reference Stark2011, Chaps. 14–6). This order was accompanied by a very different understanding of the prerogatives stemming from political property rights. For example, before Hobbes, sovereignty referred merely to the specific, limited, and traditionally proscribed rights of a king in his capacity as a judge. Sovereignty was seen as inimical to, not supportive of, discretionary power, including the creation of new law (de Jouvenel Reference de Jouvenel1997 [1957], III.12). Thus the structure of medieval governance institutions—checks and balances through polycentricity, with many organizations that comprised the order characterized by some element of incentive alignment through claims to governance revenues—achieved an admirable kind of political balance, even if the content of these institutions can rightly be condemned by defenders of an “open” society (Popper Reference Popper1945).

A key difference between the old and modern orders is in how claims to political power take form. In the medieval order, political property rights were founded on economic property rights. Governance of the realm was usually the prerogative of those who, quite literally, owned the realm. Extensive realm ownership, especially in the form of land and natural resources, earned one a “seat at the shareholders’ table,” where ensuing bargains determined the breakdown of political authority, such as the division of powers between kings and parliaments. Today, while the politically powerful often have extensive wealth, it is often the case that this wealth derives from political power. Political power in this case earns one a “seat at the shareholders’ table,” where ensuing bargains determine how these political rights will map on to claims to the economy's output. It is true that property rights in the medieval order were subject to constant flux due to robbery of some elites by others, and property rights in the modern order are in constant flux due to the shifting locus of power resulting from political enterprises carrying out their activities. Nevertheless, the difference between the two orders remains clear: claims to governance revenues once determined political power, whereas now political power determines claims to governance revenues. This relationship should be thought of as ideal-typical, in the Weberian sense. Obviously medieval elites often fought and pillaged (using political property rights to claim new economic rights), and modern politicians frequently use considerable wealth accumulated in the private sector as a foundation to launch a campaign (using economic rights to claim new political property rights). What is of critical importance is the hierarchy of rights—from which rights predominantly flow. In other words, that political and economic property rights are necessarily entangled (Wagner Reference Wagner2013; Reference Wagner2014) does not invalidate the existence of a hierarchy between these rights, with the hierarchy reversing during the course of Western society's advance from the medieval to the modern order, as documented in the previous section.

The bargains struck at each stage of the evolution in Western political society led to the inversion of the rights hierarchy as an emergent outcome. It was not intended by any of the parties to this bargain, whether they were enthusiastic initiators due to a relaxing of constraints or unenthusiastic responders due to a tightening in constraints. Nonetheless, we can classify the effects of these bargains on systems-level variables, such as wealth creation, by analyzing the choice calculus of the relevant actors in both states of the “flipped” institutional structure (Menger Reference Menger2007 [1871]). Assuming wealth-maximizing behavior, decision-makers in the first institutional structure will make political bargains and decisions that maximize the value of their resources, i.e., their subset of the privately owned realm. A claim to governance revenues, in the form of political property rights, provides some incentives for stewardship, but not complete incentives for stewardship, since kings, nobles, clergy, and trade guilds can engage in predation as well as production. Decision-makers in the second institutional structure will make political bargains and decisions that maximize their ability to control a portion of the economy's output. Since they are not initially claimants to politically secured (but economically generated) revenues, they have less incentive to steward the polity's wealth, but again only to a point—too much predatory behavior runs the risk of destroying the very wealth of which they hope to gain control.

The question is, at what stage of the political bargaining process are the incentives and propensity for production the strongest, and hence the incentives and propensity for predation the weakest? If it is wealth maximizing to institutionalize barriers to predation, which emergent outcome of the political process is the closest to nonpredatory governance at the constitutional level (Buchanan and Congleton Reference Buchanan and Congleton1998)? This will depend on the interplay between political claims to governance revenues and the division of governance roles, recognized in modern constitutionalism as the separation of powers. In isolation, these two features either only imperfectly align incentives (partial ownership of the realm incentivizes care for one's own property, but not necessarily others’) or only imperfectly prevent predation (separation of powers prevents overstepping political bounds only to the extent another political authority fears its autonomy is threatened and acts on that fear). Together, the defects of one can be shorn up by the strengths of the other, and vice versa.

PRIVATE INCENTIVES AND SOCIAL WEALTH

Revenues derived from the “corporate polity” are a function of its wealth-producing capabilities, but not one that is monotonically increasing. It bears repeating that, from the perspective of elites (whether in the old or modern orders), revenue-maximizing behavior by political shareholders does not necessarily yield wealth-maximizing behavior for society. This is why aspects of Western constitutionalism, especially the formal division of political rights among various corporate polity shareholders, are a complement and not a substitute for revenues derived from partial realm ownership.

An example of this can be seen in Wagner and Backhaus's (Reference Wagner and Backhaus1987) and Wagner's (2012a) investigation of cameralist theories of public finance and public administration. Cameralism was an approach to these fields practiced largely within the multitude of Germanic principalities, coming into maturity after the end of the Thirty Years’ War and the Peace of Westphalia. The interesting aspects of cameralism are most noticeable when juxtaposed with mercantilist recommendations on similar subjects, but most especially public finance. Great powers of the time, such as France and England, practiced mercantilist economic strategies such as auctioning off monopoly production rights and implementing taxation. These behaviors were obviously not wealth maximizing for society, but were privately beneficial for the ruler, and those who were in a position to obtain monopoly charters. According to Wagner (Reference Wagner and Backhaus2012a, 5), the great powers knew they were in a position to influence global terms of trade, and used this influence to maximize governance rents, the costs of which were passed on to nonelites. In contrast, the Germanic principalities of the time were not great powers. Over 300 polities were recognized in Germanic lands by the Peace of Westphalia, and whatever de jure statues existed binding labor and capital to a prince's lands, de facto labor and capital were highly mobile (for the time). The fragmented nature of the Germanic principalities led to a protoscience of administration and finance, cameralism, whose policy prescriptions varied greatly from mercantilist recommendations. Cameralist writers advised their local sovereigns to employ their capital within the market, rather than acting upon the market for the purposes of rent extraction. Taxation was widely regarded to be undesirable, and best left as a last-resort measure of finance in extraordinary circumstances. Elaborating on the choice calculus of a Germanic prince, Wagner (Reference Wagner and Backhaus2012a, 6) writes:

The difference between mercantilist and cameralist polities convincingly shows that formal political property rights are not sufficient for achieving good governance. Despite the popularity of absolutist political theories in Europe during this time, the differing terms of trade, both in traditional factors of production and governance itself, forced absolutist Germanic princes to adopt quasi-liberal policies, compared to their mercantilist cousins further west. This strongly suggests the importance of “something else” in better aligning governor-proprietors’ incentives with the stewardship of the polity and its wealth. In the cameralist lands, during the early- to mid-17th century, this “something else” was competition between political jurisdictions for residents (Tiebout Reference Tiebout1956). That “something else,” when it arose in England, was a division of political authority such that all elites’ abilities to engage in predation was constrained relative to historical levels. Importantly, with these divided powers also persisted an element of political claims to governance revenues. Social elites, in the form of kings, nobles, prominent clergymen, and important members of trade guilds and the growing bourgeoisie, were still in a position to disproportionately influence the terms of governance relative to the vast majority of commoners. The unintended consequence of centuries of political-economic bargaining was a form of generality norm. These groups had an ability to check the predatory tendencies of the others. The generality norm was combined with institutions that made political property holders (partial realm owners) parties to collective action. With most of these parties controlling a nontrivial portion of the wealth derived from the corporate polity, the only political results that could make it past this unique historical filter were those in a supermajority of the governor-proprietors’ interests.

While such arrangements have largely disappeared from Europe, they exist on a tiny and highly idiosyncratic scale in the microstate of Liechtenstein. Liechtenstein's constitution, the legacy of a bargaining process between the Princely family and the people (2004), reflects the chief characteristics of the theory of governance I outlined above.Footnote ³ Liechtenstein's constitution recognizes the hereditary Reigning Prince as the head of state, whose assent is required for all legislation and constitutional amendments to become law. The unicameral parliament (landtag) is vested with legislative authority. In addition to the check on the legislative process in the person of the Reigning Prince’s, citizens can force a popular vote on parliamentary legislation, as well as constitutional amendments. Liechtenstein is also highly federalized, with the municipalities having a constitutional guarantee to the right of secession. Governance of Liechtenstein thus exhibits incentive alignment over an extended time horizon, in the form of the hereditary Reigning Prince, along with many internal checks to procedure that prevent any results of collective action that do not enjoy de facto supermajority consensus from becoming binding (Salter and Hebert Reference Salter and Hebert2014, 13–6). These constitutional provisions are arguably the source of its meteoric economic growth since World War II.

Although governance in this manner initially was a European phenomenon, similar ideas (though further radicalized by the Enlightenment) made their way to the New World, in the form of the American constitutional project. This tradition is most strongly represented by Thomas Jefferson and other antifederalist/early Republican writers, in their glorification of the ideal of a republic of agrarian freeholders. Strict interpretations of the 9th and 10th amendments to the U.S. Constitution, with political decision-makers at the local level having ties to the land through their farms and homesteads, would in these authors’ and thinkers’ minds be a strong protection for the citizenry's rights against usurpation of authority and economic expropriation. The U.S. Constitution can be viewed as a conscious attempt to mimic the results of the bargains between elites that the Founders wished to jettison. The standard-bearer of this tradition in the generation subsequent to the Founding was South Carolina statesman John C. Calhoun, who played a prominent role in the conflicts over state vs. national authority in the decades leading up to the Civil War. Calhoun's contribution to political science is the theory of the concurrent majority, which is an explicit attempt to prevent majoritarian usurpation of minority rights through granting each minority group in a polity—though how constituted Calhoun does not make clear, beyond asserting such rights belong to the several states, under the social compact theory of the union—a veto on the actions of the others (Lence Reference Lence1992; see also Salter Reference Salter2014). Calhoun goes so far as to attribute the “golden age” of such polities as the Roman Republic and the Polish Commonwealth, and the current power of Great Britain, to the artistic, intellectual, and technological productivity unleashed through implementing the freedom-preserving properties of the concurrent majority.

With this understanding of the American project, we have come full circle, arriving once again at seminal modern works in political economy that also place the genius of the Founding in institutional attempts to limit arbitrary and discriminatory political power (Buchanan and Tullock Reference Buchanan and Tullock1962; Ostrom Reference Ostrom2008a [1971]). Of course, by the time of these writers the popular interpretation of the Western political tradition had changed. Progressivism had captured the imagination of both the formal hereditary aristocracy of England, and the informal meritocratic aristocracy of the United States. Combined with political unrest that resulted from rapid economic change in the 19th century, the final steps of the inversion of the property rights hierarchy outlined in Section 4 were complete, which is what rendered further bargains among political shareholders beneficial for these shareholders, but harmful for society at large.Footnote ⁴