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tion of North and Weingast (1989) to neo-institutional economic theory,
and from recent work on war and ¬scal responsibility by Ferguson (1999,
2001, 2004) and Stasavage (2002, 2003).
The logic of economic growth is fairly well understood. In the absence
of a well-de¬ned system of property rights and the rule of law, economic


This chapter is based on Norman Scho¬eld,“Power, Prosperity and Social Choice: A
Review,” Social Choice and Welfare 20 (2003): 85“118, reprinted by kind permission
of Springer Science and Business Media.

23
Architects of Political Change

growth, if it can be made to occur at all, will splutter or induce extreme
inequalities that may rend the society apart. The full apparatus of property
rights, law-based contracts, and relatively free and open markets we call
capitalism. It is the argument of this chapter that capitalism can be the
engine of growth. Indeed, experience over the last two hundred years
suggests that it is the only known reliable engine of growth. However,
without the control mechanism that we call democracy, capitalism can
become cancerous, leading to cycles of expansion and collapse.
The appropriate links, or inter relationships, between capitalism, the
engine of growth, and democracy, the mode of control, are subtle. They
have been explored by political economists for more than three hundred
years. Recent formal advances over the last sixty years in both economic
and political theory suggest how precisely the engine and the control
system should be linked, so as to avoid collapse into chaos. The design of
democratic capitalism is essentially a problem of social engineering. When
the relationship between the economy and the polity is poorly designed,
then the causes of the erratic behavior of the engine are examined by those
perceptive individuals we may call “prophets” of chaos. The redesign, or
recalibration of the engine, and its control, as well as the relationship
between them, is carried out by those we could call “social engineers.”
However, since the design change typically involves transformation in
the institutions of the political economy, I use the metaphor architects of
change.
I ¬rst illustrate the problem of political economy for different cases
around the world and then discuss the arguments of a number of prophets
of chaos, including Olson and Kennedy. I shall then go on to outline the
historical development of various solutions by architects of change, ¬rst in
Britain, then the United States. I shall attempt to show how these various
solutions all derive in one way or another from fundamental principles of
social choice theory.


2.2 the world today
Economic growth can occur in the absence of a full system of property
rights and free markets. One has only to think of China, which steadily
attains economic growth over 8 percent. Control is exercised by an oli-
garchy, determined to stay in power and resist, by force, any tendency to
democracy.
In periods in the past, particularly in the 1930s, the propensity for un-
controlled capitalism to collapse into chaos made such command systems

24
Power and Social Choice

very attractive. If one considers the balance between the possible chaos of
capitalism and the order maintained within an oligarchy or dictatorship,
it is easy to see why many would prefer order. In fact, the logic of such a
choice depends on the empirical evidence. As Keynes (1936) clearly saw,
it is also the case that people in a democracy might prefer the order pos-
sibly induced by dictatorship to the chaos of the market.1 This dilemma
stimulated Keynes™ thoughts on how capitalism could be restructured at
the global level to lessen the chances of chaos. At least since the end of
the 1970s, the Atlantic democracies in Europe and North America have
mitigated the possibility of economic chaos. This in turn means that the
people of China, when they compare the advantages of their own eco-
nomic command system to those of a more democratic capitalism, are
likely, increasingly, to prefer the latter. Moreover, the growing inequality
will, in all probability, increase their demand for greater openness in their
political life. This, in turn, will make it more dif¬cult for the oligarchy
to exert control. One troubling aspect of this may be the attempt by the
oligarchy to refocus the demands of their people toward territorial ex-
pansion. It is also likely that, without democratic control, the spurts of
regional economic growth will exacerbate social tensions within China
itself. It is because of the likelihood of territorial expansion or internal
chaos that I view the kind of uncontrolled economic growth exhibited in
China at present to be potentially dangerous.
At least the local freeing of regional markets accompanied by political
oligarchy in China has led to economic growth. In contrast, the Soviet
Union, under Gorbachev, tried a different strategy of opening up the polity
to some extent, allowing greater freedom of expression and movement.
The idea was obviously based on the hope that political freedom might
trigger a greater degree of economic growth than had been possible within
the rigid command economy. Western advisers after 1990 concentrated
on the attempt to put in place a system of property rights and law-based
contracts, while stressing the opening of the market. In the 1990s, a rather
unusual electoral system led to fragmented parties, and increased power
for the president. At the same time, concentration of crucial economic
power and resources created an economic oligarchy.

It is interesting that Keynes (1936) in emphasizing uncertainty implicitly rejected the
1

logic of probable belief that he had set out in his Treatise on Probability (Keynes,
1921). Although it is not often emphasized, Karl Popper™s scienti¬c philosophy (Pop-
per, 1935) gave an argument against induction as well as Keynes™s theory of probable
belief. It seems that the chaotic events of the 1930s induced both Popper and Keynes
to reject certainty. See Chapter 7.

25
Architects of Political Change

At present, President Putin is engaged in a kind of economic civil war
with this oligarchy for political control. There seems little chance that real
democracy will develop in Russia without considerable delay. Although
economic growth has began to occur, it has been concentrated in the ex-
tractive industries of oil, diamonds, and minerals. Such growth may lead
to greater inequality, social unrest, decreased life expectancy, epidemics,
and so on. The fact that the events of September 11, 2001, have made
Russia and the United States allies against terrorism, seems to have en-
hanced Putin™s power. It is true that autocratic power may induce sta-
bility; however, once power is obtained, it may become very dif¬cult for
democracy to take root.
An imbalance between the economy and the polity can also kill eco-
nomic growth even in societies that outwardly appear democratic. Japan
is an interesting case in this regard. After the postwar “reforms,” Japan
seemed to have a fully functioning democracy. However, as I shall argue
more fully below, the essential component of democratic control is that
it occurs through a competitive polity, which utilizes the diverse beliefs
of the electorate. For whatever historical reasons, Japan™s polity is con-
trolled by a single party, the Liberal Democratic Party (LDP). The party
is a coalition of factions, whose leaders comprise an oligarchy. To fund
the factional competition, the factions have formed alliances with various
banks and companies. The nature of these political-economic alliances
has allowed the economic agents to expand into property or production.
Because the factional alliance has been able to extract capital cheaply
from the electorate, through the post of¬ce, capital was effectively sub-
sidized. This meant that the true cost of the risk of capital expansion
was not appreciated. The property collapse of the early 1990s was simply
a manifestation of this political manipulation. While something similar
may have been the cause of the savings and loan debacle in the United
States, the difference in the U.S. case was that the economic agents were
forced eventually to face the consequences of their risk taking. In Japan,
in contrast, the political factions still depend on the banks and companies
for ¬nancial support. Consequently, the oligarchy cannot bring itself to
force the banks to face the true costs. It is probable, of course, that the
costs are large enough to bankrupt the entire ¬nancial system. Even so, the
outcome is a kind of economic disease. The ¬nancial links between Japan
and other countries in Asia have meant that Japan™s disease is infectious.
Economic problems in Malaysia, Indonesia, the Philippines, and so forth,
induce greater social unrest, and make whatever democratic institutions
there less viable.

26
Power and Social Choice

The lesson from Japan is that whenever the political system is insuf-
¬ciently competitive and open, then corruption ¬‚ourishes. Competition
entirely within the political apparatus may be insuf¬cient to deter corrup-
tion. Corruption may, over many years, induce a kind of low-level cancer
of the economy. Italy, for example, would usually be considered a compet-
itive democratic society. Until 1992, the conventional wisdom would have
been that, if anything, Italy was too competitive, in the sense that govern-
ments were highly unstable and of brief duration. It was seldom noticed
that all Italian governments included the dominant Christian Democratic
Party, the DC (Mershon, 2002). By shifting coalition partners, the DC
was able to stay in power, bribing parties like the Liberals and Social
Democrats with powerful ministries. This had little apparent effect on
economic growth, but the hidden side effects were incessant corruption,
inef¬cient government, and growing budget de¬cits.
Only a vigorous effort by a radical group of magistrates was able to
expose the degree of corruption. Most of the parties in existence prior
to 1993 have collapsed in political convulsions. Changes in the electoral
law in the 1990s, from a pure system of proportional representation (PR)
toward one with mixed PR and plurality, have led to a new political system
based on two coalitions of parties, the Olive Branch (“Ulivo”) and the
House of Liberty (“Casa delle Liberta”). Although Italy™s unemployment,
at 8.4 percent, is not as high as that of France (10.0 percent) or Germany
(9.6 percent), its budget de¬cit, at 4.4 percent is much higher than the
other members of the EU.
In Israel, there has been no dominant party or coalition of factions.
The electoral system is based on PR, and a dozen parties are represented
in the Knesset. Competition between the two major parties, Labor and
Likud, is keen. Governments dominated by the two parties have oscillated,
with Likud in power after 1988 and after 1996, and Labor in power un-
der Rabin in 1992 and under Barak in 1999. However, from 1988 on, a
key pivotal party has been the smaller Sephardic party known as Shas.
Controlling the balance of government, Shas was able to extract power-
ful ministries, ¬rst from Netanyahu and later from Barak (Scho¬eld and
Sened, 2006). In the last election, Sharon, leader of Likud, formed a coali-
tion with Labor (offering Peres the foreign ministry). The Oslo agreement
with the PLO, negotiated while Rabin was Prime Minister after 1992, had
come apart, and Israel has been riven with violence. Until the formation
of the Likud“Labor coalition of Sharon and Peres, it seemed that faction-
alism would prevent any signi¬cant move toward a peaceful resolution.
Recently, however, Sharon has shown his risk-taking ability by pulling

27
Architects of Political Change

back from Gaza, despite the opposition of both settlers and members of
his own party. This may give the Palestine state the opportunity to develop
democratic institutions.
Some of the current challenges facing the EU were brie¬‚y discussed in
Chapter 1. At present, the focus is on economic union, ushered in with
the euro in January 2002, as well as the inclusion of the other European
polities of Hungary, the Czech Republic, Slovakia, Cyprus, and possibly
later Turkey, or even Israel. The East European countries have, in general,
made great strides toward democratic capitalism in the past decade, but
the EU is primarily concerned with the problem of free mobility of labor
into the EU. In some sense, this is a question of full enfranchisement, with
all social and economic rights, of the population of the new member states.
Indeed, this question only serves to highlight the dif¬culty of political
control that the EU faces.
¨
Although political leaders such as Chirac, Schroder, and Blair, for ex-
ample, differ on how they see the ¬nal form of the EU, it will probably
be a federation, rather than a full federal union such as put in place in
the United States circa 1788. One problem is that each of the member
states devised somewhat different modes of political control after World
War II. Britain has always had a plurality electoral system, dominated
by two large parties with opposing ideas about the proper relationship
between the individual and the state. In the 1970s, the intense degree of
competition this engendered between the parties may have contributed
to the high degree of social con¬‚ict”between labor and management for
example. As has been argued in the past (Duverger, 1954, 1984), plurality
rule seems to force parties to offer differing solutions to dif¬cult problems.
This in turn forces the electorate to make a choice. In Britain in 1979,
the electorate chose Thatcher, and this led directly to a restructuring of
the economy: inef¬cient public industries were privatized and the labor
market was made much more free. This strategy did have extreme costs
for some, particularly in coal mining and shipbuilding, but it did make
Britain™s economy more ef¬cient.
Other countries in Europe have based their electoral systems on PR.
Theory suggests that PR polities will emphasize coalitional cooperation,
sometimes called “consociationalism.” In any case, labor“management
relations in the core EU states were much more peaceful in the 1970s and
1980s than they were in Britain. However, the cost of cooperation can
be a lower emphasis on adaptation. While this is obviously a great over-
simpli¬cation, theory provides a plausible explanation why the EU mem-
bers of continental Europe typically have labor markets that are somewhat

28
Power and Social Choice

less ¬‚exible and maintain greater state intervention in the economy than
either Britain or the United States. This feature is also a characteristic of
the larger political economy of the European Union. By itself, the degree of
state intervention simply re¬‚ects, in some sense, the average risk posture of
the European electorate. However, the EU institutions are not democratic
in nature. Parliament, though elected, has little power, other than budget
approval. Decisions are made in a complex bargaining arrangement be-
tween the appointed Council of Ministers and the appointed bureaucracy
of the Commission.
The diverse opinions of the European electorate are only re¬‚ected,
indirectly, through negotiations within the Council of Ministers, and in
bargaining between EU heads of state. No institutional apparatus is avail-
able for electoral opinions to be sampled directly. Olson™s (2000) analysis
suggests that politicians are inadequate to the task of controlling the econ-
omy, if they are not subject to electoral control.
To be more speci¬c, this is the logic of democracy: Although the elec-
torate may be highly diverse, and probably not fully informed, it is the
case that wise choices for the economy can only be made by aggregating
these diverse opinions through a sophisticated democratic apparatus. By
sophisticated democratic apparatus, I mean one that presents the elec-
torate with a full range of possible options, as well as a full range of likely
outcomes of these choices. Not all electoral systems are capable of this
sophistication. For example, if bargaining is an endemic feature, then a
wide range of options will not be discussed in the political arena. In the
same way, if there is a dominant party that becomes used to the exercise
of power, or there is a powerful bureaucracy habituated to the restriction
of policy choices, then political discourse will be too limited to engender
wise choices.
Obviously this creates a paradox for the happy exercise of political
choice. On the one hand, it is advantageous to have multiple parties, of-
fering diverse options to an electorate. On the other, the electoral response
must be clearly interpretable to all, so that the choice once made can be
seen to be both legitimate and intelligible. How these two seemingly in-
compatible requirements can be met is one challenge facing the exercise
of political choice.
A second related problem for democracy is the balance between the
constraints imposed on government and the ability of politicians to per-
ceive problems and offer solutions. The appropriate balance has to do
with the ¬‚ow of information between the electorate and politicians. Ob-
viously, weakening competition provides politicians with the opportunity

29
Architects of Political Change

to engage in self-serving activity, such as the kind of corruption that has
been prevalent in Japan and Italy. Moreover, politicians have a tendency
to obfuscate serious economic and political problems, leading possibly to
eventual crisis situations. Questions of information turn on freedom of ex-
pression and inquiry. Most important perhaps, all polities must deal with
uncertain futures, and therefore with questions of how to deal with risk.
Sophisticated democracies have devised institutional means to balance
differing risk postures and to weigh short-term bene¬ts against long-term
development.
Many of these dif¬culties of political choice were perceived with vary-
ing degrees of clarity by political theorists or practitioners of the past; we
might consider Thomas Hobbes, Robert Walpole, Adam Smith, David
Hume, James Madison, Alexander Hamilton, and, indeed, Abraham
Lincoln.
In the rest of this chapter, I outline what I believe can be learned about
how best to construct political institutions, using the ideas of social choice
theory to understand the dilemmas of chaos and risk.


2.3 democratic dilemmas
Hobbes™s argument of 1651 was that the state”Leviathan”was necessary
to prevent the chaos made likely by people™s propensity to resort to force.
Underlying this conception of society is the notion of a zero- or constant-
sum game. By relinquishing some of their freedom to an autocrat who
alone can exercise force, a people can free themselves, perhaps, from
chaos.
Keynes™s argument of 1936 has many Hobbesian features. For Keynes,
chaos could come about not from the exercise of force, but from specu-
lation in the market place. Rejecting the equilibrium view derived from
Adam Smith and Marshall, Keynes provided a rationale for the excessive
“exuberance,” and then collapse, of the market. He accepted a limited
equilibrium hypothesis for certain exchange markets, but asserted that “a
somewhat comprehensive socialization of investment will prove the only
means of securing an approximation to full employment” (Keynes, 1936:
378).
Although Hobbes and Keynes focused on different aspects of the role of
the state (the political realm and the economic realm), both acknowledged,
in a sense, the logic of the exchange of freedom for the gift of security, the
avoidance of risk.


30
Power and Social Choice

Implicitly, both theories require that the state be endowed with power
suf¬cient to exercise its part of an “equilibrium” contract. Implicitly, in
the Hobbesian view, the state should be powerful enough to defeat any
anarchic agent in its domain. For Keynes, economic chaos could only be
mitigated by an agent commanding suf¬cient resources to stabilize spec-
ulative markets. The greater the volatility of a market”the greater the
¬‚ow and value of transactions”then the greater the economic resources
needed to control this volatility. Keynes saw that the great quandary fac-
ing decision makers at the end of World War II was how to exercise
suf¬cient resources to stabilize world markets and exclude the possibility
of a recurrence of the Depression. As it was, the institutional devices put in
place under Bretton Woods, and then the Marshall Aid program, as well
as the later devices of the 1960s, were insuf¬cient to prevent the mone-
tary and trade disorder of the 1970s. Since the 1980s, political leaders
have refrained from the Keynesian attempt at global risk management.
Fortunately, technological change and greater market sophistication have
prevented the chaotic collapse that Keynes feared. Various alliances, such
as the EU and NAFTA can be seen as regional attempts at risk avoidance
and partial market control. Nonetheless Keynes™s fears are still relevant.
Neither Hobbes nor Keynes dealt fully with the consequences of an
unchained Leviathan. Many prophets of chaos have, of course, taken the
position contra Keynes”that the legitimization of government interven-
tion in the economy will necessarily lead to excessive manipulation. Even
in a democratic milieu, a political party in power may manipulate for its
own ends, attempting to engineer economic growth in the short run so
as to ensure re-election. To some extent, the huge literature on this topic
underestimates the capacity of electorates in developed countries to see
the costs of such manipulation and reject those responsible. Nonetheless,
the balance between the preservation of liberty in the populace, and the
appropriate degree of power available to government, is a delicate one.
Arguments can be made that the correct balance should privilege lib-
erty. Keynes was very much aware of some of the subtleties of the appro-
priate balance. Experience of the 1930s suggested to him that if the state
shows itself incapable of limiting economic chaos, then the electorate will
voluntarily choose dictatorship. As he wrote, “Authoritarian state sys-
tems . . . seem to solve the problem of unemployment at the expense of
ef¬ciency and of freedom” (Keynes, 1936: 381).
In essence, Keynes proposed a compromise: by sanctioning limited
government intervention to limit economic disorder, the choice between


31
Architects of Political Change

dictatorship and “order” on the one hand and liberty and “chaos” on the
other could be avoided.
The danger of dictatorship, of course, is that the process by which a
dictator comes to power will engender risk taking. The biographies of
the dictators of the twentieth century suggest strongly that only arrogant
and ruthless men can come to positions of such extreme power. As they
gather the power of the state, and necessarily limit economic freedom,
they curtail, as Keynes saw, the ef¬ciency of their economy. Because such
dictators are obliged to seek greater resources, they will do this not sim-
ply through domestic economic growth, but by military expansion. This
creates a dilemma for other liberty-preserving, democratic states.
A dictator, in his ascent to power, will have learned that risk taking
pays off. In foreign adventures, he will be guided by the same risk pos-
ture. In democracies, risk taking may or may not pay off, but in general,
political leaders will not be as extremely risk taking as their dictatorial
opponents. Thus Hitler, for example, seemed able to force his generals to
take extreme risks in the early stages of World War II, to the consterna-
tion of both French and British political leaders. Hitler believed that the
German success by May 1940 would force French capitulation, as well
as British acquiescence to German domination of Europe.
Such a situation creates a quandary for any democracy. Because ordi-
nary people in a democracy will tend to be risk avoiding, at least when it
comes to military adventure, so will their leaders. But if a democracy faces
an adversarial dictatorship, then risk avoidance by the democracy™s lead-
ers will only engender further aggression by the dictator. The dilemma
facing Britain in May, 1940 illustrates this dilemma. As Lucaks (1999)
and Jenkins (2001) have both noted, Hitler had offered to let Britain be,
thus preserving its empire, as long as the political leaders in Britain ac-
quiesced to Hitler™s conquest of the continent of Europe. At that time it
was unknown whether many of Britain™s army, stranded in France, could
be saved. In the war cabinet, Halifax, with support from Chamberlain,
pressed Churchill to acknowledge the German conquest of Europe, and
to negotiate for the preservation of the Empire. Although it was obvious
that France would soon capitulate and Italy would join the Axis pow-
ers, Churchill not only refused to acquiesce, but on France™s surrender to
Germany ordered the sinking of the remnant of the French ¬‚eet at Mers-
el-Kebir, near Oran, Algeria. Such risk taking by Churchill may well have
seemed irrational to Halifax. Nonetheless, Churchill™s judgment over the
“honesty” of Hitler and the probable eventualities proved to be correct.
Every democracy must deal with this risk dilemma.

32
Power and Social Choice

My reading of Hamilton™s arguments at the time of the constitutional
debate in the thirteen states in 1787“8 suggests that he was well aware
of the necessity that the federal bargain between these thirteen states deal
with risk appropriately by devising mechanisms “to increase . . . external
force and security” (Freeman, 2001: 197).
Hamilton™s arguments in the Federalist were based on a number of al-
most axiomatic points. First, even republics can be addicted to war. So, a
federal union was necessary to restrict the possibility of con¬‚ict between
the states. Second, such a union could more effectively counter outside
threats from Imperial powers such as Britain, France, and Spain. Third,
an important element of the ability to counter threat is the development
of an ef¬cient economic system”a common currency”and provident ¬s-
cal mechanisms to raise government revenue. Fourth, Hamilton argued in
Federalist IX that Montesquieu regarded a confederate republic “as the
expedient for extending the sphere of popular government and reconcil-
ing the advantages of monarchy with those of republicanism” (Freeman,
2001: 198).
For Hamilton, republicanism meant the exercise of the “science of
politics” to distribute power through “legislative balances and checks”
(Freeman, 2001: 197). This argument, taken together with James Madi-
son™s in Federalist X and Federalist LI, suggested that representatives of
the republic would tend to make wise choices. Although it is not clearly
articulated in the writings of Hamilton and Madison, the “wise” choices
of the representatives are understood to be those made in times of peace.
I suggest that the reference to “monarchy” in Federalist IX refers to the
necessity of the concentration of power, and thus of the tendency to take
risk, in the presence of threat of war.2
Although Hamilton was later reviled for his alleged predilection for
monarchy, he was, in fact, aware of this democratic dilemma of risk. While
democracy depends on the dissemination of power in normal times, it may
require the capacity to concentrate decision-making capacity in times of
danger. The particular institutional form of the United States may indeed
provide a solution to this dilemma of power.
The intuitions of Hamilton and Madison in this regard depended on
their reading of history, particularly British constitutional history. To


In fact, in Federalist XI, Hamilton went on to argue that Europe had for too long been
2

“mistress of the world,” and that union would permit the creation of an “American
system” able to “dictate the terms of the connection between the old and the new
world.”(Freeman, 2001: 208). This remark is discussed further in Chapter 4.

33
Architects of Political Change

better understand their appreciation of this dilemma, and how it relates
to an interpretation of the present, I discuss later the development of
the British polity in the early modern period, and then compare it with
the evolution of U.S. economic and political institutions. Before doing
this, however, I consider Kennedy™s arguments on the inevitable decline of
empire.


2.4 the logic of empire
We may follow North and Weingast (1989) and Weingast ( 1997a,b) and
date the initiation of the British Empire in the period 1688 to 1694, with
the Glorious Revolution and the foundation of the Bank of England.
Kennedy (1987) sees the rise from 1688 and fall of the British empire
over a three-hundred-year span (until, say, 1957) to be an example of a
certain inexorable logic of empire.
To illustrate his more general argument, consider the growth of the
Spanish empire from the accession of Charles of Hapsburg to the throne
of Castile and Aragon in 1516. In 1519 he was elected Holy Roman Em-
peror, as Charles V. From his mother, Charles inherited Naples, Sicily,
Sardinia, and the South American domains. From his father, he held the
Netherlands, part of the Duchy of Burgundy, and from his grandfather,
Maximillian, Austria and the Tyrol. After Charles™s abdication in late
1555 in the Netherlands, his son Philip II become sovereign over an em-
pire extending from the Moluccas in East Asia to New Spain, in what
is now California. Until his death in 1598, Philip had to contend with
war with France and Britain, as well as the Ottoman Empire. Against the
great naval victory of the Hapsburg Holy League over the Ottomans at
Lepanto in 1571 must be set the disaster of the failure of the Armada
against England in 1588.
The increasing cost of incessant warfare bankrupted Spain. Parker
(1998) suggests that war in Germany in the 1540s cost 1 million ducats
annually, in the Netherlands in the 1550s about 2 million ducats annu-
ally, and in Flanders in the 1590s about 3 million ducats annually. In
1557, 1560, 1575, and 1596, Philip II was forced to reschedule his debts,
essentially admitting the treasury was bankrupt. In 1560, the debt was
29 million ducats, and by 1574 it had risen to 81 million ducats (at least
¬fteen years™ total annual revenue). Kennedy implies that these spiraling
costs forced Spain, after Philip II, to cede its dependencies; the Nether-
lands were granted independence in 1648, while Naples, Sardinia, Pied-
mont, and the Southern Netherlands were ceded to Austria in 1714. Even

34
Power and Social Choice

though Spain took in tribute from South America (of the order of 2 million
ducats annually under Philip II), its economy was insuf¬cient to cover the
costs of maintaining the empire (at least in Europe). In 1701, the Hapsburg
dynasty was replaced by the Bourbons. Through the eighteenth century
Spain lost further territory in the Americas, including Santo Domingo and
Trinidad (and then Louisiana in 1802, after it had been ceded to Spain by
France in 1763). In 1808, Napoleon forced the Bourbon line to abdicate.
Although the empire was immense at its greatest extent, internal eco-
nomic contradictions brought about a slow demise over two hundred
years. Indeed, economic historians, when they enquire why Latin Amer-
ica has never followed its northern neighbor into prosperity, suggest that
the inef¬cient institutions that hinder growth in the southern continent
derive from those of Spain (Haber, 1997).
As a second example, consider the Ottoman Empire which we can
regard as founded in 1453, at the conquest of Constantinople by Mehmet
II. The Ottomans took Athens in 1456, Belgrade in 1521, and Rhodes in
1522. However, Suleymain died on campaign with his troops in Hungary
in 1566 without ever taking Vienna. Cyprus was captured in 1570, but
this only led to the great defeat of Ottoman naval power at Lepanto
in 1571. The long decline of the Ottoman Empire made possible Greek
independence and the autonomy of Moldavia, Wallachia, and Serbia in
1830. Indeed, Russian troops occupied Istanbul in 1833 to preserve it from
a rampaging Egyptian army. By 1854, the empire was obliged to borrow
from London, and in 1875 it declared bankruptcy (Goodwin, 1999).
Kennedy suggests that the French empire in the modern sense, dates
from 1661 when Louis XIV took full control of the French government.
Between 1660 and the end of the War of Spanish Succession in 1713,
French government debt had increased by a factor of seven (Kennedy,
1987: 106). Indeed, by 1770, after two more major wars against Britain,
French government debt was of the order of 1.8 billion livres (about
75 million pounds sterling). Norberg (1994), for example, estimates
French government expenditure to be 442 million livres (about 18 million
sterling) in 1763, against income of 425 million livres. Increasing debt in-
curred increased interest rates (nearly 7 percent). Although income had
increased to 470 million livres in 1788, this was inadequate to service the
much greater debt resulting from French involvement in the American
Revolutionary War (by then the debt was of the order of 3.6 billion livres,
or 150 million pounds). It is probable that the dif¬culty of dealing with
this debt caused Louis XVI to call the Estates General in 1789, indirectly
bringing about the French Revolution.

35
Architects of Political Change

After the Terror, and the creation of the Consular Triumvirate,
Napoleon restructured the French ¬scal apparatus. Nonetheless, the ¬-
nancing of his wars in Europe was generally carried out not through
taxation, but from spoils (Schom, 1997). Thus, the risk taking of the
sovereigns of France led inevitably to the ¬nancial crisis of 1789, and
hence the revolution. The aftermath of the revolution brought to power
an even greater risk taker”Napoleon”who, in pursuing great rewards,
brought about a great disaster.
One point that Kennedy does not emphasize is that the British in-
curred much greater debt than did France in the prosecution of war in the
eighteenth century. Brewer (1988) shows that British debt of 17 million
sterling (about ¬ve years™ government revenue) in 1697 had increased
to 243 million sterling (twenty years™ revenue) by 1784. According to
Norberg (1994: 375), the average interest rate on British debt was about
3.8 percent. Indeed, after the American War, Pitt was able to increase
taxes, retire some of the debt, reducing debt service from 76 percent to
50 percent of government revenue. Unlike France, Britain, from 1783 on,
was in no danger of succumbing to bankruptcy and dictatorship.
As a military historian of World War I, Kennedy is intrigued by the
escalating cost of the arms race between the powers that took place prior
to 1914. He charts both the relative decline of industrial power of Britain,
vis-a-vis Germany, Russia, and the United states, as well as the great
increase of military and naval personnel, and thus the relative cost, for
the European powers. However, Ferguson (1999) questions Kennedy™s
inference that the increasing war burden contributed to Britain™s decline
from hegemonic power. First, the increase of Germany™s annual military
expenditure between 1894 and 1913 was 57 million sterling (over 150
percent) in comparison to the British increase of 39 million sterling. In
line with my reasoning, Germany™s leadership was oligarchic, or even
dictatorial, and was seemingly much more risk preferring than were the
political leaders in Britain. Total government debt for Britain fell in this
period, from 655 million sterling to 625 million, while German debt rose
from 419 million to more than 1 billion.
As a percentage of national product, Britain™s debt was only 28 percent,
compared with Germany™s 44 percent, France™s 86 percent, and Russia™s
47 percent (Ferguson, 1999: 127). It is true that the First World War was
an unmitigated, and expensive, disaster for all the powers. Expressing
total war expenditure in dollars (and as a proportion of 1914 national in-
come) we obtain the following: Britain, 45 billion (409 percent); Germany,
32 billion (266 percent); France, 30 billion (500 percent); Russia,

36
Power and Social Choice

12 billion (172 percent); Italy, 13 billion (780 percent); and the United
States, 36 billion (100 percent). It is not at all surprising that the twenty
years after World War I proved economically dif¬cult as the combatants
attempted to deal with the huge debts incurred.
From 1933 to 1938, increasing military expenditure repeated the pat-
tern prior to 1913. German and Soviet expenditure (in dollars) rose from
450 million (Germany) and 700 million (USSR) in 1933 to 7.4 billion
(Germany) and 5.4 billion (USSR) in 1938. For Britain, the increase was
from 333 million to 1.86 billion. The vastly expensive war of 1939“1945
left Britain, Germany, and France exhausted and essentially bankrupt.
Even by 1960, after the success of post-war Marshall aid in restructuring
the European economies, the U.S. GNP was still approximately twice that
of Britain, Germany, France, and Italy, combined.
Writing in the late 1980s, Kennedy saw the relative economic decline of
the United States in the period 1960“1980 as presaging the absolute loss
of American hegemony in the global economy. Between 1960 and 1980
the U.S. share of world product fell from 26 percent to 21.5 percent, while
that of the European Economic Community fell from a similar proportion
to 22.5 percent. Japan™s rose from 4.5 percent to 9.0 percent, while that
of the Soviet Union fell slightly from 12.5 percent to 11.4 percent. Im-
plicit in Kennedy™s analysis was the empirical generalization that empires
choose to expend resources on military adventures, weakening their econ-
omy, thus hastening bankruptcy and their own demise. This hypothesis
seemed compatible with the increase of the U.S. Federal de¬cit from about
60 million dollars in 1980, to more than 200 billion dollars in 1985, as
a result of the increase in defense expenditure and the cut in taxes under
Reagan (Kennedy, 1987).
Although Kennedy was aware of the dif¬culties that the Soviet Union
faced in the 1980s over feeding its population, it was little suspected at
that time that the USSR was approaching bankruptcy. Kennedy™s own
¬gures suggest why the bankruptcy occurred. Estimating USSR military
expenditure in 1980 at $144 billion and GNP at $1.2 trillion gives a rate
of over 10 percent. Table 2.1a compares United States and USSR mili-
tary expenditure during the 1980s. These ¬gures suggest that Kennedy™s
imperial hypothesis was relevant to the Soviet Union, but not to the
United States, at least until 1991. The beginning of the collapse of the
USSR, and the loss of its empire in Eastern Europe, can be plausi-
bly related to the hidden bankruptcy resulting from excessive military
expenditure. Table 2.1b shows the extreme drop in Russian military
expenditure in the 1990s.

37
Architects of Political Change

Table 2.1a. A Comparison of U.S. and Soviet Military Expenditure,
1984“1991

Military Expenditure Military Expenditure
Military Expenditure (as % of government (per capita in)
Year (as % of GNP) expenditure) 1994 dollars)
USSR US USSR US USSR US
1984 13.0 6.2 50.2 26.4 1321 1388
1985 13.1 6.4 50.0 25.7 1327 1466
1986 12.8 6.6 46.9 27.1 1329 1318
1987 12.9 6.3 45.9 27.2 1315 1496
1988 12.7 6.0 46.6 26.2 1352 1452
1989 11.5 5.8 43.5 25.5 1219 1428
1990 11.0 5.5 43.1 23.5 1117 1363
1991 10.3 4.9 NA 19.6 951 1189


Kennedy™s arguments on relative U.S. economic decline are also im-
plausible. His ¬gures of $11,360 for U.S. GNP per capita in 1980, com-
pared with $13,590 for West Germany and $11,730 for France are mis-
leading because they are based on current exchange rates. In contrast,
Figure 2.1 presents estimates of GDP per capita in constant 1985 dol-
lars, using purchasing power parity (PPP), for six of the OECD countries.
Although economists like to focus on the annual rate of increase of to-
tal GNP, Figure 2.1 suggests that the appropriate basis for comparing
growth is increase in GDP per capita per annum in real PPP terms. By this

Table 2.1b. A Comparison of U.S. and Russian Military Expenditure,
1992“1999

Military Expenditure Military Expenditure
Military Expenditure (as % of government (per capita in)
Year (as % of GNP) expenditure) 1999 dollars)
Russia US Russia US Russia US
1992 8.0 4.8 28.0 21.1 491 1360
1993 7.5 4.5 35.4 19.9 419 1280
1994 8.3 4.1 25.7 18.8 406 1200
1995 5.8 3.8 22.1 17.4 271 1130
1996 5.4 3.5 26.7 16.5 246 1070
1997 6.0 3.3 30.9 16.3 274 1060
1998 4.6 3.1 17.9 15.8 196 1030
1999 5.6 3.0 22.4 15.7 239 1030
Source: World Military Expenditures and Arms Transfers, U.S. Arms Control and Disarma-
ment Agency, 1994 and 2002.

38
Power and Social Choice

20000

18000

16000

14000
GERMANY
12000 FRANCE
JAPAN
10000
ITALY
BRITAIN
8000
USA
6000

4000

2000

0
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19

Figure 2.1. Estimates of GDP per capita (in 1985 dollars) for six OECD countries, 1950“
1992. Source: The graph is based on purchasing power parity using data from World
Development Indicators and the Organisation for Economic Cooperation and Development
(OECD) (http://www.oecd.org/linklist).


measure, all the OECD economies grew at approximately the same rate.
The U.S. growth, from about $8,000 to $18,000 during a forty-year
period, gives an average annual increase of $250 per capita. The per capita
¬gures for Germany, France, and Britain are $312, $250, and $180, re-
spectively, compared with $340 for Japan. Obviously, differing average
real income increases imply changing relative economic power. However,
Figure 2.1 does not seem consistent with the existence of an absolute U.S.
decline. The six economies represented in Figure 2.1 all exhibit a plateau
in per capita income. The level of the plateau is presumably determined
by social, political, and economic institutional features”such as the de-
gree of labor mobility, stock market sophistication, debt structure, and
so forth. The U.S. plateau in 1990 is approximately $3,500 higher than
that of Germany or Japan. In fact, further growth by the United States
in the 1990s suggests that the U.S. plateau is higher than is indicated by
Figure 2.1.
Kennedy may well have based his argument on the extraordinary eco-
nomic and political problems of the 1970s. These problems may have
been induced by governments believing in a Keynesianism that Keynes
himself would not have accepted. There seems very little theoretical ba-
sis to the notion that, by playing with money aggregates, a government
could permanently adjust in¬‚ation/unemployment combinations. In the

39
Architects of Political Change

early 1970s, the weakening restrictions of the gold standard, and the inter-
national ¬‚ow of dollars, gave governments the opportunity to experiment
with in¬‚ation/unemployment ratios conducive to re-election. Such an act
by government violates the medieval “¬duciary” relationship between the
sovereign and the people, proscribing the debasement of the coinage.
Goodhart and Bhansali (1970) were perhaps the ¬rst to note that induc-
ing an electorally optimal “short-run” combination of in¬‚ation and unem-
ployment along the so-called Phillips curve, would also probably trigger
in¬‚ationary expectations. As Brittan later observed: “Over a run of polit-
ical cycles the short-term Phillips curve will drift upwards . . . democratic
myopia and economic time lags will land the economy with an excessive
rate of in¬‚ation” (Brittan, 1978: 172).
A whole host of prophets of chaos studied the deleterious economic ef-
fects of governmental electoral “rationality” (Nordhaus, 1975; Mac Rae,
1977; Tufte, 1978; Alt, 1979; Brittan, 1983). One of the most interest-
ing arguments of that time was due to Beer (1982). He postulated that
in polities with ¬rst-past-the-post (or plurality) electoral systems (such as
Britain and the United States), the decline of party identi¬cation would
permit small groups in the polity to be unconstrained in their “rent seek-
ing” claims. Because plurality electoral procedures magnify vote swings,
relatively small groups could blackmail the government. It was certainly
true that, in Britain, competition between different labor groups became
intense during the 1970s. With in¬‚ation approaching 25 percent on oc-
casion, weakly organized groups, such as nurses or university teachers,
lost economic ground rapidly. The chaos theorems of McKelvey (1976,
1979) and Scho¬eld (1978) seemed to provide a formal explanation of
the disorder of the time.
In arguments somewhat similar to those of Olson (1982a, b), the the-
orists of “consociational” or “corporatist” democracy (Lijphart, 1969;
Lehmbruch, 1979; Crouch, 1985) argued that democracies with strong so-
cialist or social democrat parties, and encompassing labor unions, should
be able to manage political bargaining more effectively than the lib-
eral market economies (such as Britain and the United States). Recently,
Garrett (1998) compared the “consociational democracies” with the poli-
ties based on plurality, to see which of them proved less adept at main-
taining economic growth in the so-called global world economy of the
1990s. Table 2.2 adapts information for 1980“95 taken from his book.
The four consociational/corporatist polities all have quite powerful so-
cialist/social democrat parties that have been in of¬ce at least some time
during the 1980s. (Garrett also includes Finland and Norway in this ¬rst

40
Power and Social Choice

Table 2.2. Twelve Democratic Polities: 1980“1995

Countrya Unionb Gc Bd Ee Uf Ig Mh
Corporatist
’8.0
Sweden 83 67 1.9 1.8 8.2 10.0
’3.0
Denmark 74 62 3.1 8.3 6.5 14.8
’3.8
Austria 46 52 2.4 3.2 3.5 6.7
’4.6
France 10 53 1.9 9.0 7.0 16.0
’4.9
Average 59 1.9 5.7 6.4 12.0
Mixed
’6.0
Belgium 55 56 2.0 10.9 4.8 15.7
’9.1
Italy 34 54 1.9 10.3 10.8 21.1
’3.0
Germany 31 49 2.1 7.6 2.9 10.5
’3.3
Netherlands 23 54 1.6 9.6 2.9 12.5
’5.4
Average 53 1.95 9.6 5.4 15.0
Liberal
’5.6
UK 38 43 2.0 9.5 7.6 17.1
’6.2
Canada 32 48 2.6 9.2 6.4 15.6
’2.9
US 15 34 2.5 6.7 5.4 12.1
’0.9
Japan 25 34 4.2 2.5 2.5 5.0
’3.9
Average (with Japan) 2.85 7.0 5.5 12.5
’4.9
Average (without Japan) 2.4 8.6 6.5 15.1
’4.7
Overall Average 51 2.2 7.4 5.8 13.2
a The countries are grouped according to percentage share of left wing cabinet portfolios
over 1980“90.
b Union = Percentage trade union membership in 1990.
c G = Government spending as percent GDP, 1991“5.
d B = Budget balance, de¬cit (’) or surplus (+) as a percent of GDP, 1991“5.
e E = Economic growth, per annum, average 1980“90.
f U = Unemployment, average percent, 1980“90.
g I = Consumer price in¬‚ation, average percent, 1980“90.
h M = Misery index = U+I, average 1980“90.

Source: adapted from Gerald Garrett Partisan Politics in the Global Economy (1998), by
permission of Cambridge University Press.


category, but places France in the second “mixed” category.) In this second
mixed category, the left has controlled, on average, less than one quarter
of the cabinet positions during the 1980s. In the four liberal/plurality poli-
ties, the left was out of power in the 1980s. Nonetheless, Table 2.2 is sug-
gestive. There does seem to be a tendency for governments of corporatist
democracies to absorb a greater share of GDP, and to run budget de¬cits.
Unemployment in the 1980s in the Scandinavian democracies tended to
be lower than in the OECD as a whole, while growth was somewhat
lower and in¬‚ation somewhat higher than in the United States, say.

41
Architects of Political Change

Table 2.3. Twelve Democratic Polities: August 2005

Countrya Bb Ec Ud Ie Mf
Corporatist
+0.8
Sweden 1.4 7.1 0.6 7.7
+1.8
Denmark 0.8 5.4 1.6 7.0
’2.0
Austria 2.0 5.6 2.4 8.0
’3.0
France 1.8 10.0 1.6 11.6
’0.6
Average 1.5 7.0 1.6 8.6
Mixed
’0.5
Belgium 1.4 12.3 3.1 15.4
’4.4 ’0.2
Italy 7.8 2.0 9.8
’3.5
Germany 1.1 11.6 1.9 13.5
’2.2 ’0.5
Netherlands 6.7 1.6 8.3
’2.7
Average 0.6 9.6 2.2 11.8
Liberal
’2.9
UK 1.7 4.9 2.0 6.9
+1.2
Canada 3.3 6.9 1.9 8.8
’4.1
US 3.6 5.0 3.2 8.2
’6.1 ’0.2
Japan 1.3 4.4 4.6
’3.0
Average (with Japan) 2.5 5.2 1.7 7.1
’1.9
Average (without Japan) 3.0 5.5 2.1 8.0
’2.1
Overall Average 1.5 7.3 1.9 9.1
a The countries are grouped as in Table 2.2.
b B = Budget balance de¬cit (’) or surplus (+) as a percent of GDP for previous year.
c E = Economic growth, as percent change in GDP, over previous year.
d U = Unemployment, average percent, over previous year.
e I = Consumer price in¬‚ation, average percent over previous year. Because the “de¬‚ation”

of ’0.2% for Japan is an economic “bad,” it is interpreted as + 0.2% in computing the
misery index.
f M = Misery index = U+I, average, previous year.

Source: OECD. http://www.oecd.org/linklist.
This table updates the one in Norman Scho¬eld, “Constitutional Political Economy:
Rational Choice Theory and Comparative Politics,” The Annual Review of Political Science
3 (2000).


Fairly clearly, the table suggests that the predictions of the prophets
of chaos of the 1970s and early 1980s were confounded by the events
of the late 1980s and early 1990s. The “liberal” polities of the United
States and Britain did not fall into a stag¬‚ationary trap, forced by their
electoral systems to attempt to keep unemployment down and in¬‚ation-
ary expectations up. I emphasize the differences between Table 2.2, for
the 1980s, and Table 2.3, which presents similar economic data for


42
Power and Social Choice

August 2005. In¬‚ation is obviously not a problem for the developed
economies at present.
Indeed de¬‚ation (falling prices) has begun to be a serious problem in
Japan. Average unemployment has tended to fall from the 1990s to the
present, in the liberal polities, though it has recently risen somewhat in the
United States. In Germany, Italy, and France, unemployment rose during
the 1990s and has stayed high. Budget de¬cits in the countries in the EU
were required to be below 3 percent but in France, Germany, and Italy,
the de¬cits are 3.0 percent, 3.5 percent, and 4.4 percent, respectively.
Japan, meanwhile, has been running a budget de¬cit of about 6 percent,
while the de¬cit for the United States has increased to 4.1 percent. It is
possible that France, Belgium, Germany, and Italy have high unemploy-
ment ¬gures because of the EU requirement of low budget de¬cits, and
the imposition (through the monetary discipline of a single currency) of
low in¬‚ation. Because their unemployment rates have been high since at
least 1994, it is more likely that these ¬gures are due to structural features
of the political economy. In line with Garrett™s argument, the three social
democratic/corporatist polities (Sweden, Denmark, and Austria) have all
managed to maintain low in¬‚ation, moderate unemployment, and rea-
sonable growth. However, Tables 2.2 and 2.3 suggest that there is some
evidence for a version of Beer™s hypothesis involving the relationship be-
tween the state and interest groups.
To avoid the kind of economic chaos of the 1970s, it could appear ra-
tional to build up the apparatus of the state bureaucracy. This can create
an interest group whose purpose becomes misdirected toward the main-
tenance of its own power. An enormous literature (e.g., Niskanen, 1971)
has focused on this problem. Some versions of this theory emphasize the
involvement of government in this manipulation. For example, in polities
based on PR, the necessity of bargaining between multiple factions may
force government to become subject to veto power exercised by groups
controlled either by labor or capital. In theory, such veto groups could
extract surplus from the economy, thus lowering economic growth and
hurting every member of the society in the long run. I return to this point
in the next section.
The break up of the Soviet Union in the 1990s opened the way for
the expansion of the EU to the east, but also seemingly made the United
States the sole global power. French outrage at this turn of events led
Hubert Vedrine, the French foreign minister, to call the United States
“a ˜hyperpower™”the ˜country that is dominant or predominant in all


43
Architects of Political Change

categories”attitudes, concepts, language and modes of life™” (quoted in
Sa¬re, New York Times, June 10, 2001).
This turn of events, resulting from the demise of the Soviet Union in
1989, may be similar in some ways to the collapse of France in 1789.
In the eighteenth century, France had fought a sequence of global wars
against a ¬scally superior power, Britain. The collapse into the chaos
of revolution after 1789 brought about the rise of Napoleon and a last
grasp at empire. This failed, and France entered a long period of slow
decline. The political collapse of the Soviet Union after 1989 was, by
Kennedy™s thesis, the consequence of the ¬scal inef¬ciency of its economic
system. Unlike France in the eighteenth century, it was not so much debt
resulting from participation in a world war, but the Soviet Union™s attempt
to compete militarily with the United States. The superior economic and
political institutions of the United States allowed it to outspend the USSR
in the arms race of the Cold War. The inferior “institution” of the USSR
was, fundamentally, the structure of its autocratic polity. Indeed this had
the same design ¬‚aw of French political institutions in the eighteenth
century.
It is my contention that there is also a close parallel between the evolu-
tion of political and economic institutions in Britain from 1688 to 1789,
and in the United States from, say, the post“Civil War period, circa 1878,
until the end of the Cold War in 1989. The “¬scal ef¬ciency” constituted
in Britain in the eighteenth century was a necessary cause of Britain™s abil-
ity to prosecute the imperial wars against France and Spain. It was the
creation of this ¬scal war machine that led to the collapse of Napoleonic
France in 1815 and opened the way to British hegemony during the nine-
teenth century. History, of course, does not repeat itself, and there is
no way of knowing whether Putin™s Russia will attempt a ¬nal imperial
thrust, or whether the United States will maintain its “hyper-puissance”
throughout the twenty-¬rst century. However, we can make some guesses
about the rise to hegemony of Britain and the United States by consider-
ing the origins of British ¬scal ef¬ciency in the seventeenth and eighteenth
centuries, and comparing them with the structuring of the institutions of
the U.S. political economy after 1787.


2.5 social choice theory: autocracy and risk
For Olson, the key feature of a society is the degree of concentration of
power. Markets can, of course, exist in the presence of an oligarchy, as
the case of China, today, illustrates. However, oligarchs are likely to use,

44
Power and Social Choice

or pervert, markets for their own ends, and attempt to weaken rights to
property, and so forth. Olson also emphasizes the likelihood that when
power is even more highly concentrated in the hands of an autocrat”
like Stalin in the USSR”then capital (and labor) will be con¬scated from
the subjects of the autocrat. This will certainly destroy the incentives for
productive activity in the economy, and hinder growth. As I have sug-
gested above, the autocrat will tend to be risk preferring and utilize the
con¬scated resources for purposes that are ill suited to growth. The ar-
guments of Kennedy and Olson are, in this regard, compatible. Just as
with Philip II of Spain, in the sixteenth century, the kings of France and
then Napoleon in the eighteenth century, and Hitler and Stalin in the
twentieth century, autocrats will lead their subjects into disaster. Even so-
cieties that are democratic, at some phase, may fall into autocracy out of
fear of economic chaos, just as Keynes perceived. In earlier times, chaos
was more likely to be induced by factional disorder; it was this likelihood
that prompted Hobbes to argue for the necessity of a powerful sovereign.
The establishment of the Protectorate in Britain, under Oliver Cromwell
in 1653, can be seen as such a “fall” into the autocracy that Hobbes dis-
cussed. Olson™s theoretical arguments, taken together with Kennedy™s his-
torical studies, suggest that extreme concentration of power in autocracy,
or dictatorship”the seeming opposite of chaos”can lead to excessive
risk taking, then decline, and ¬nally collapse.
Another alternative, proposed in the previous section, is that certain
polities can become subject to veto power exercised by groups, controlled
either by labor or capital. As Buchanan and Tullock (1962) suggested
many years ago, such a design is likely to lead to lengthy and inef¬cient
negotiations over policy. We may characterize such a design as “extreme
risk avoidance.”
Figure 2.2 offers a diagrammatic representation of these interpretations
in terms of two axes”stability and risk. An “ef¬cient” polity is one that
escapes, in some way, the dangers of chaos, the risk taking of autocracy,
and the risk avoidance of multiple veto group bargaining.
I ¬rst use some ideas from social choice theory to elaborate on the
implications of Figure 2.2. As in many of the following chapters of this
book, I assume that there are at least three fundamental dimensions char-
acterizing social policy: land, capital, and labor. By “land,” I refer to the
distribution of land in the society. “Labor” is shorthand for the distribu-
tion of social rights, including enfranchisement and religious tolerance.
“Capital” means the revenue/tax structure and the “balance” of creditors
and debtors in the economy. These three dimensions have been used by

45
Architects of Political Change

No veto groups
“Chaos”




Stability
axis



Democratic
Stability




“Stability”
Risk axis

Multiple veto groups Single veto group Oligarchy Autocracy or
“extreme risk avoidance” or collegium dictatorship:
“extreme risk-taking”

Figure 2.2. Chaos or autocracy in a polity.



Rogowski (1989) to study con¬‚ict in a political economy. I elaborate on
Rogowski™s analysis in the chapters that follow.
The “decisive structure” refers to the distribution of power. Typically,
the sovereign and a coterie of great landowners or aristocrats form either
an oligarchy or collegium. If an oligarchy, then this group belongs to every
winning coalition, and is itself winning. In such a situation, the oligarchy
can control social choice in certain domains, such as war. It is of course
possible that the sovereign and aristocratic elite disagree: for example,
Hoffman and Rosenthal (1997) and Rosenthal (1998) model bargaining
between sovereign and elite over the advantage of war. As we have seen,
however, the choices made by such an elite oligarchy are unlikely to be
advantageous for long term growth.

46
Power and Social Choice

If the elite group is a collegium, belonging to every winning coali-
tion but not itself winning, then it essentially has a strong veto and can
siphon all surplus toward itself. Such a characterization might describe
a situation where the elite forms alliances with different social groups
to raise taxation for purposes of war, and then repudiates the implicit
contracts. To give a very simple example of the possibilities, consider a
situation with ¬ve factions {A, B, C, D, E} in Parliament, and let K rep-
resent the sovereign. If K alone is winning (or decisive), then the situation
is one of extreme autocracy, as indicated by the right hand vertex of
Figure 2.2. At the opposite extreme, on the left vertex, is the case where
all the factions, and the King, are necessary for a decision”the case of
extreme risk avoidance. On the other hand, if the King is powerless, and
any coalition of three factions {A, B, C}, say, is winning or decisive, then
the so-called Nakamura (1979) number is three.3 The theoretical anal-
yses of Scho¬eld (1984a) and Strnad (1985) show that, in this case, an
equilibrium (a “core”) can be guaranteed only in one dimension. In two
dimensions, a core will generally not exist, and in three dimensions, chaos,
or complete disorder, can ensue (Scho¬eld, 1985a).
Suppose, on the other hand, that every coalition of the three factions
requires the inclusion of K to be decisive. Then K is a collegium (and has
a unique veto). The Nakamura number is in¬nite, and a core is always
guaranteed.4 Theory implies that K can extract all surplus.
Although Figure 2.2 is an extreme simpli¬cation of a complex social
choice problem, it can be used to illustrate some of the problems of chaos
or risk discussed above. Recent events in Serbia, Bosnia, Kosova, Lebanon,
Afghanistan, Iraq, and Palestine all suggest that chaos is a real possibility
when there are powerful opposing interests and no institutional check or
balance to political con¬‚icts. In the Soviet Union prior to 1989, power
was concentrated in the Politburo and the elite of the communist party.
Depending on the degree of concentration, policy making could be risk
taking (as it appeared to be under the rule of Stalin) or much more risk
averse (as it probably was under Brezhnev). My interpretation of current


The Nakamura number, v, is three because there are three separate winning coali-
3

tions “ {A, B, C}, {C, D, E}, and {A, B, E}, “ with nobody in common. The smaller
the Nakamura number, the more likely chaos will occur. An equilibrium is guaranteed
whenever the dimension is no more than v ’ 2. In this example, disorder can occur
in two dimensions but not in one.
K is now in every single winning coalition, so it is impossible for a family of winning
4

coalitions to have nobody in common. By “convention,” the Nakamura number is,
in this case, said to be in¬nite. However, chaos cannot occur.

47
Architects of Political Change

events in Japan is that the existence of multiple veto groups within the
LDP, the bureaucracy, and big business make it almost impossible to deal
with the intractable economic problems.
Inference drawn from the study of the PR polities of the EU suggests
that their characteristic of multiple veto groups (such as farmers) prevents
necessary policy changes, with respect to agriculture and labor mobility,
for example. However, certain EU institutions such as the Commission,
may act as collegia in speci¬c policy domains. Thus the change to the
Euro as a common currency in January 2002 may have risk-taking char-
acteristics.
It is my contention that the necessity of devising institutional rules
in order to balance stability and risk was apparent to the architects of
change in their analyses of the constitutions of Britain and the United
States. Hobbes (1651), of course, perceived the importance of the stability
dimension. My interpretation of the argument of Alexander Hamilton
and James Madison in particular suggests that the second risk axis was
also understood in some form.
To examine how stability and risk may be balanced, in the context
of the underlying social choice theory represented by Figure 2.2, let us
abstract from the political history of Britain in the early modern period.
Suppose, in contrast to the above example of ¬ve factions {A, B, C, D, E}
and sovereign, K, that each coalition of three factions needs to include
K in order to be decisive. However, suppose further that the entire par-
liament {A, B, C, D, E} is also decisive, against the sovereign. In this case
there is no collegium, but K can be termed a semi-collegium. Such a deci-
sive structure results in what may be named an apex game. The Nakamura
number is now four.5 A core is always guaranteed in two dimensions, but
not in three. In three dimensions, the game is no longer chaotic, but will
result in an outcome that depends on bargaining between the King and
the factions. The next section provides a brief interpretation of the evo-
lution of British constitutional history in the seventeenth and eighteenth
centuries to make the point that the British polity evolved toward an
apex game. In brief, the ability of Parliament and its allies in the 1640s to


To see this, note that there is a family of four winning coalitions “ {A, B, C, K},
5

{C, D, E, K}, {A, B, E, K}, and {A, B, C, D, E} “ with nobody in common. Thus
v = 4, and stability is guaranteed in two dimensions, while disorder (or the lack of
equilibrium) can occur in three dimensions. As indicated in the text, chaos can occur,
but it requires four dimensions. Note that in chapter 1, I used the term “weak auto-
crat” for the United States president. The distinction between the king and president
resides in the federal nature of the U.S.

48
Power and Social Choice

overwhelm Charles I showed that it could be decisive, although at great
cost. Events after 1649 indicate that without a semi-collegium, Parlia-
mentary behavior was indecisive or chaotic. Oliver Cromwell, as Lord
Protector, made clear the danger of autocracy. The constitutional chal-
lenge that had to be faced after the Restoration of Charles II in 1660 was
how to avoid the twin dangers of autocracy and chaos. I develop the ar-
gument of North and Weingast (1989) that the “Glorious Revolution” of
1688 formalized the structure of the apex game, but that political equi-
librium was not attained until about 1721. What I call Walopole™s Whig
equilibrium was sustained for a long period of Whig dominance, and in-
deed endured until at least the end of the Napoleonic wars in 1815. In
fact, this fundamental equilibrium was maintained until the repeal of the
Corn Laws in 1846.
The maintenance of this equilibrium enabled Britain to establish its
commercial empire and ushered in the industrial revolution. In turn, the
basis of Britain™s increasing military power in this political equilibrium
provided the context for the constitutional argument in the United States
from 1787 on.


2.6 social choice in britain: 1625“1776
I now provide a brief interpretation of British constitutional developments
from 1625 on, attempting to use the social choice ideas just introduced.
There is general acknowledgment that the ¬scal problems of Charles I
were crucial for the constitutional changes that occurred in the seven-
teenth century. However, what triggered the changes to come had partly
to do with Charles™s apparent threat against Scotland.
As Davies has observed, Charles I “incensed the nobility (of Scotland)
by the famous Act of Revocation (1625), which re-annexed all the church
and crown lands that had been alienated since 1542” (Davies, 1959: 86).
Charles followed this up in 1637 by attempting to force a Book of Com-
mon Prayer on Scotland. The subscribers to the Covenant “swore to re-
sist to the death these . . . innovations which were unwarranted by the
word of God, contrary to the Reformation and to acts of parliament,
and tending to the re-establishment of popery and tyranny” (Davies,
1959: 88).
To raise an army to put down what he saw as rebellion, Charles called
Parliament in 1640. Just as in France in 1789, so in England in 1640
this Parliament, under the leadership of Pym, refused to vote the required
subsidies. Charles dissolved Parliament on May 5, 1640.

49
Architects of Political Change

Charles™s attempts to raise money from the city of London, and then
from the Kings of Spain and France, proved fruitless. The success of
the Scots in their invasion caused the great peers Essex and Warwick
to demand the recall of Parliament, and this Long Parliament ¬rst met in
November 1640. Instead of playing on the hostility between Lords and
Commons, Charles attempted to impeach ¬ve members of the Commons
for encouraging a foreign (Scots) army to invade England. The Lords re-
fused these articles when they were presented, and instead Charles entered
the Commons with his supporters. The House of Commons, however, was
uncowed.
The ¬rst Civil War concluded with Charles™s surrender to the Scots in
1646. The second Civil War of 1646“8 ended with his trial and beheading,
on January 30, 1649. Many causes, including both religious con¬‚ict and
disagreement over ¬scal arrangements, have been proposed for the Civil
War. In fact, disagreements over land (the Scottish annexation), capital
(debts and ¬nance), and labor (religion), and the existence of multiple
and overlapping factional interests suggest that the politics of England
and Scotland were truly chaotic in the 1640s.
As commander of the New Model Army, Oliver Cromwell gradually
took on the role of autocrat. His defeat of a Scottish army at Preston in
August 1648 was followed by his invasion of Ireland in August 1649, at
the head of an army of twelve thousand. The prize was land, for after
defeating the Irish, two thirds of the land of Ireland changed ownership.
After the execution of Charles I, the Scottish aristocracy proclaimed his
son as Charles II, King of Great Britain, France, and Ireland, but also de-
manded that he accept the Covenant. A Scottish army was later destroyed
at Dunbar by Cromwell. It is hardly surprising that Hobbes was impelled
to argue in Leviathan (1651) for the necessity of an autocrat, or sovereign,
to impose peace. The remnant of the Long Parliament, the Rump,
refused to dissolve itself, and in 1654 Cromwell entered the Commons
and cleared the House. A Nominated Parliament of 140 representatives
drew up a written constitution, the Instrument of Government, which
declared the Lord Protector (Cromwell) to be the head of the executive.
The lessons from this political experiment were threefold. The ¬rst,
Hobbesian, lesson was that a powerful veto player (or sovereign) such as
Cromwell, was perhaps necessary to prevent factional chaos. Second, this
sovereign must be capable of prosecuting necessary wars. In Cromwell™s
case, these were in Ireland, Scotland, and in Europe against the Dutch and
Spain. Third, because the wars were extremely expensive, some method
of limiting the sovereign™s appetite for war had to be devised. Due to

50
Power and Social Choice

Cromwell, two further innovations were made which greatly affected the
future development of the empire. To counter Dutch trade dominance,
the ¬rst of the Navigation Acts was passed in October 1651. This for-
bade the importation of goods into Britain from Asia, Africa, and the
Americas, except in British ships. Cromwell also began the development
of a powerful navy; forty heavily armored ships were built from 1649 to
1651 (Baugh, 1994).
While Cromwell™s innovations proved important, his risk taking and
the attendant high taxation exhausted the country. After Cromwell™s death
in September 1658, his son Richard became Protector, but his inability
to command respect made chaos again a possibility. The newly elected
Parliament immediately arranged for the restoration of the Stuart line
by Charles II in 1660. In a sense, the political game had changed. The
lesson of the Civil War was that the King could be defeated by a uni¬ed
Parliament, together with its allies. On the other hand, the King, together
with his Royalist allies and the landed elite could also win. As noted above,
such an apex game has a solution involving compromise between the King
and Parliament. Notice that the King and his allies do not quite form a
collegium, as there is an opposing winning coalition”a united Parliament.
Nonetheless, the King™s group belongs to almost every winning coalition.
I have used the term semi-collegium to refer to the power of the King™s
group.
Part of the resulting “equilibrium” after 1660 involved ¬xing the King™s
annual income at 1,200,000 sterling and making arrangements to cover
the debts incurred by Charles I. The substantial debts of Cromwell were
repudiated. Debts of 500,000 sterling, associated with the navy, were not,
however, settled. Charles II made no attempt to offer a threat to Parliament
on what I have termed the labor axis”religion”and the compromise held
until his death in 1685. His brother, James II, was less risk averse, and the
Declaration of Indulgence of May 1688, seemingly pro-Catholic, brought
the religious threat to bear. Parliament was dissolved by the King in July
1687, and James began building an army of 16,000 in Ireland. The birth
of an heir in June 1688, and the suspicion that he would be christened
Catholic, was the ¬nal straw. Parliament offered the “joint” crown to
Mary, James™s daughter, and her husband William of Orange. James ¬‚ed
and died in France in 1701.
The new contract underlying this “Glorious Revolution” between the
joint sovereigns and Parliament re¬‚ected the lessons that had been learned
in the previous ¬fty odd years. In essence, William acted as agent for Par-
liament, in the prosecution of wars in Ireland and then against France.

51
Architects of Political Change

As a precaution against autocracy, the Declaration of Rights declared
it illegal to maintain a standing army in time of peace. In return, Par-
liament, in a sense, pledged to provide the resources for the sovereign
through the founding of the Bank of England in 1694. Although North
and Weingast (1989) suggest this founding was a device to ensure ¬s-
cal “credible commitment” it was not unanimously approved. As Clark
(1956: 177) noted many years ago, some Whigs feared that the Bank
would increase the degree of autocracy of the sovereign. This likelihood
was averted by requiring Parliamentary approval before any loans were
provided to the crown. Landed Tory interests also opposed it because of
the implied obligation that the monied interests would support the rev-
olutionary settlement. Stasavage (2002, 2003) has also commented on
the heterogeneous preferences in Parliament and asked why the contract
implicit in the settlement and founding of the Bank was binding.
The main point made by Stasavage is that the predominant interests
in Parliament were landed. It is therefore not obvious why they would
ally with monied interests in a willingness to guarantee the increasing
debt. In essence, he suggests that the Tories were landed interests who
opposed both taxation and religious tolerance. According to Stasavage,
the Whigs, both landed and monied, formed a coalition in support of reli-
gious tolerance. Landed Whig interests, by this theory, accepted taxation,
which bene¬ted monied interests, as a quid pro quo for their support. This
implied two dimensionality (capital and religion) is plausible. However,
rather than religious tolerance, it would seem more reasonable that war,
against France, was the common interest of the Whigs. Approximately
10 percent to 15 percent of the Commons were of the monied interests,
creditors essentially holding shares in the Bank of England.6 For con-
venience we could describe those creditors as having a “hard money”
preference on the capital axis. A commitment to safeguard this debt by
eschewing repudiation depended on the willingness of the landed interests
to accept taxation. Because the purpose of the debt was war, a bargain
could be struck between those of the landed and monied interests who
supported Whig prosecution of this war. And because war certainly had
a religious connotation, and was regarded generally as involving civil lib-
erty, we can denote preferences in this regard to be on the labor axis.7


Stasavage cites historical evidence that the “broader mercantile community in Par-
6

liament after 1715 was overwhelming Whig” (Stasavage, 2003: 157).
Regarding the third labor axis as religious, Stasavage notes that most dissenters (non“
7

Church of England) voted with the Whigs. However, dissenters would naturally fear

52
Power and Social Choice




War Axis




George III

Heart



Hanoverian
War Outcome




Landed pro-war Whigs Monied pro-war Whigs



Whig Equilibrium

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