Ideology and the Evolution of Vital Institutions

* Article/Book: Ideology and the Evolution of Vital Institutions. A Synopsis. By Earl A. Thompson.

URL = http://www.dklevine.com/archive/jh_et.pdf

A very important interpretation of the evolution of institutions.

Context

It is important to have a concept of society and humanity that honors both the cooperative and the competitive impulse, the inner construction of nations, and their defense capacities against take over. This is the evolutionary point of view taken by this book and summary essay, applied to the welfare of nations and labor, with a view to have democracies that can defend themselves.

Discussion

Michel Bauwens:

This is from a differently ordered synopsis of a book with the same title.

I am largely paraphrasing the text here below.

According to Earl A. Thompson:

"The major movements in social and economic history can be separated into

- those concerning the distribution of wealth, and

- those concerning the efficiency of the allocation of resources for a distribution of wealth." (p. 1)

The 1990s Clinton boom was marked by both an expansion of foreign trade and near full-employment, while real hourly wages fell, which constitutes an anomaly in 'modern' history.

This should be explained by an upwards shift in effective foreign labor supplies. This can be largely related to the IMF globalization policies which only became effective after the fall of the Soviet system.

The IMF attempted to:

1) remove barriers to foreign trade

2) increase middle classes at the expense of aid to the poorer sections of society

3) increase funds to combat crime and corruption

The combined effect was to significantly expand the world's literate and stable workforce.

The harsh IMF conditionalities, in the context of a contest to attract the masses in the Global South, would have been impossible before the fall of the Soviet system, which acted as an alternative attractor. The globalization regime imposes uniform tax rates so that states cannot effectively compete for people. After the end of the Cold War, higher productivity no longer led to higher incomes. This is a return to the situation that existed for five millenia under state regimes, until 1820!! It is only after the defeat of Napoleon had instilled fear in the European elites, that a 150-year expansion of wages began, through a five-fold increase from 1825 to 1975. The cost of these wars had signified that warfare had become to costly. This resulted in a nearly hundred-year long peace between European nations. "Western ruling classes began to steadily compete for ordinary people!" (p. 6).

By contrast, after the sudden radical decentralization of the 9-10th cy due to the invasions of the Normans, Saracens and Turks, the European ruling classes had reacted by initiating servitude, to bind the masses to the land. Serfdom declined in the Late Medieval/Early Modern period because of the emergence of people-trapping nation-states. "Thus there was, prior to the 1820s, an 'iron law' of wages." (p. 8). After-tax wages remained at subsistence levels for the centuries before 1820. After the defeat of Napoleon, immigration waves showed the historic increase in wages and income, motivating people to leave. But, "this golden age of populism and technological improvement is coming to an end ... If history is any guide, (this trend) will only end in basically subsistence standards of living for ordinary individuals." (p. 9) .. "The ongoing reductions in wage income will decrease inheritances until the the capita stock inherited will be insignificant." (p. 10). "The Post-Cold-War end to the competition of states for people, has spelled an end to the .. income floors." (p. 10).

A relative measure against this would be to create a world-institutional environment that renders fiscal independence to states. so that they can again effectively compete for ordinary people. Thompson believes that we must add to this the 'anti-aristocratic preference' that is a 'common benevolence' in modern democratic societies and that this could help in maintaining a distribution of income that is more favourable than the pre-1820 norm.

So, if ruling classes can maintain the people within their borders they tend to use taxation to limit wages to subsistence levels, but when states have to compete, workers can escape the iron law of wages.

"A 'popular government' is a govt in which initial strategy selectors allow other members of the ruling class to be approved or appointed by ordinary people, often through pre-set political institutions ... Wealthier members of the ruling class can always combine to buy out the masses by offering them benefits that will come at the cost of their children ... The same re-assertion of aristocracy can be accomplished through sufficiently high levels of deficit-spending." (p 13) ... "Our decreasingly populist election processes all indicate the ease with which these aristocratic buy-outs occur." (p.14)

"States have in them some source of internal degeneration despite their theoretical efficiency, an efficiency that was evidently being displayed in some form during their ascendancy. ... Why would the presumably relatively objective ascending states so quickly lose their objectivity upon reaching a condition of dominance within their civilizations ? The answer can be found in the cartelized nature of free-entry intellectual establishments, whose ideas are biased in a direction that maximizes their own collective return, by artificially increasing the ruling class demand for their teaching and advice. Dominant states are particularly vulnerable to their domestic intellectual cartels." (p. 15)

=> Information made available to the ruling classes are biased by the demand-creating incentives that educate the ruling classes !!

"When a single teacher-cartel gains effective control over the education system, and directly or indirectly, teaches the society to appreciate only one set of exaggerations, then the objective competition among the various teacher cartels to educate leaders is destroyed and an ideology has arisen." (p. 17)

Chapter 3-5 examine the rise and fall of 3 different institutions: guilds, the gold standard, and 20th cy. international institutions. "Section IV will identify a social-evolutionary model from which the entire pattern can be understood.

"A certain type of capital, 'coveted capital', is an attraction to potential aggressors against the state. Its accumulation decreases national security unless there is a suitable increase in national defense expenditures ... An efficient government taxes this capital ... An efficient government must also solve a basic time-inconsistency, in which the state must commit itself to spend more on defense than the defended property is worth. Without such a commitment, some potential aggressor state will make such a commitment, and the property will be theirs." (p 18) "The legislature, ... constrained by narrowly rational voters (is) unwilling to expend more ..' (p. 190The military achieves this over-ride (by) employing conscription, .. expropriations, wartime price controls .., and creating government money." ... When economic intellectuals gain substantial control over the policies of democratic states .. the predictable result is the systematic military failure of the ideologized state." (paraphrase of p. 19)

"Guilds are politically active, entry-restrictive, producer associations .. The first western European guilds arose early in the dissolution of the Carolingian Empire and spred during the ensuing emergence of feudalism as an integral part of the small, investor-democratic, commercial enclaves that arose amid the violent, near-subsistence, living conditions of the 9th-10th cy. While feudal institutions were largely eliminated as a result of the political centralizations of the later Middle Ages, guilds actually strengthened during this period, and did not systematically fall until the 18th and 19th centuries." (p. 20)

"Maximum prices and minimum quality restrictions imposed on the guilds largely eliminated their short-term monopoly power." ... "Royal towns, those organized to serve kings rather than local lords, adopted the same set of entry-restrictive guild regulations." (p. 20)

"Guilds made substantial wartime sacrifices for the collective defense of their states. This defense-oriented theory, which is shown to be capable of explaining the structure of historical guild institutions on a worldwide basis. ... Whenever .. Medieval democracies instituted anti-guild reforms, they promptly succumbed to foreign aggressors. This historical pattern dramatically contradicts the inefficient-monopoly theory, while supporting .. defense-oriented efficient government theory." (p 21)

Guild could only be efficiently abolished if a replacement functionality was at hand, f.e. "English war finance became the envy of Europe by the late 1720s. The emergency support function of guilds then became superfluous ... English guilds withered and died in the 1730s. Parliament somehow correctly perceived that English guilds had outlived their last vestige of social usefulness and could be replaced by simple income taxes. The same pattern repeats itself throughout the 18th and 19th centuries: States captured by re-emergent laisser-faire ideology of the 'Enlightenment', prematurely attacking guild regulations promptly suffered military disasters, while states remaining quite pragmatic and eliminating guilds only after instituting gold standards subsequently experienced impressive economic growth." (p. 22)

Ideologies can destroy states! Thompson also sees Keynesianism in this negative light, and defends the efficiency of the gold standard.

"The gold standard (is) .. a monetary system offering the free peacetime convertibility of paper money into precious metal at an intemporally fixed price, (but) also allowed the state's central authorities to suspend gold payments during military emergencies. Once the emergency was over, .. common law judges could be expected to enforce the original contract ... The advantage of a gold standard over other monetary systems .. lies in its ability to finance emergencies. An increase in wartime money supply, while bidding up wartime prices, increases the expected deflation to the future peacetime period when full convertibility will be restored to its normal pre-war level." (p. 25)

"The monetary expansion will increase the real money supply and thereby the government's wartime purchasing power. .. The government's expected potential wartime purchasing power is limited only by its future taxation power, such taxation being required in order to retire the abnormal wartime monetary issue. Such authoritarian wartime real monetary expansions are vital to effective democracies, whose legislatures are too rational to execute the commitment necessary to maintain their states in the face of broadly rational threats from potential aggressors. .. In alternative, inconvertible, monetary systems, increases in wartime money supply do not create a rational expectation of a post-war fall in prices .. which means that the government's purchasing power from money fall during defensive emergencies. .. The resulting weakness of inconvertible monetary systems relative to the gold standards in providing emergency financial aid to democratic authorities has never been appreciated by economists." (p. 26)

The dangerous error in Keynesian and modern macroeconomic thought is therefore the belief that emergency expansions in the money supply in an inconvertible monetary system will increase the purchasing power of money.. Economists .. fail to see that a gold standard or related form of convertible money was vital to the survival of pre-WWII democratic states. .. It correspondingly leads economists to fail to appreciate the critical social function of postwar depressions that were a regular feature of guild-free democratic nations prior to WWII. .. They, like the democratic government of late 17th cy Holland, would never have survived. .. When Keynes and his early followers led Britain, and soon the rest of Western Europe, to abandon the gold standard in the early mid-1930s, these democracies were stripped of a vital institution and left for the gold-standard retaining, less ideologically impaired, US to defend to defend them against fascist aggression." (p. 27)

"One lesson of the above institutional histories is that the wealthiest state in any civilization have their peacetime regulations determined by democratic legislatures rather than an authoritarian legislative process. The competing city-states of Classical Greece, the Roman Republic, Byzantium, the early Medieval towns of Western Europe, the later Medieval city-states, the emerging nation-states of the Early Modern period - all the great success stories of their day -- were organized and run by cooperating representatives of various significant investors rather than authoritarian philosopher-kings." (p. 28)

"A social or economic ideology ..will bias political calculations regarding the benefits stemming from various policies and thereby generate an inefficient outcome. Similarly, an ideologized bureaucracy, by failing to enforce seemingly irrational or unethical legislative enactments, will similarly imply inefficient outcomes. An ethic, which we call 'civil reverence', enables government officials to avoid succumbing to these distractions and thereby immunizes the state against these perversions of the democratic process. Indeed our historical study reveals that only civilly reverent states are effective." (p. 29)

"Modern style, popular democracy .. arises only when states must compete for people .. Democratic rights in an efficiency-generating state may be restricted to significant property owners. The recent, globalization-based, distributional trend .. is thus leading the US not to authoritarian rule but to the aristocratic democracy that it possesed prior to the late 1820s." (p. 30)

"Consider a given state, a sef-defended society whose ruling class lives substantially above subsistence. Collective defense is vital for that state because the state will soon perish if collective defense is insufficiently supplied. Effective democracies have a problem in providing such defense because such polities act as rational maximizers .. Guilds and the gold standard were vital to the effective democracies they supported because they greatly facilitated authoritarian over-rides to democratic decision-making during military emergencies." (p. 30)

"Our hierarchical leaders must be able to perceive threat to their society and appropriately respond. Since the payoffs, both private and social, are so high for the individuals getting it right, it is appropriate to allow rational choice in these cases." (p. 32)

ET calls the necessary approach 'Pascalian', as it combines natural intuition and rationality. Ideological interference destroys this capacity.

"Either the state gets these institutions right, or it is soon replaced. .. In response to the vital-institution attacking social and economic ideologies, .. a type of long-term equilibrium is reached when a civilizational empire is formed, a hegemonic state that asserts military dominance over its generally once-dominant inferiors. The lack of military competition among states in this imperial civilization implies, besides convergence to an inefficient static quasi-long-run equilibrium, a highly inegalitarian income distribution ... The ancient Egyptian, Chinese and Roman Empires are early examples. The Byzantine, Frankish and Muslim empires appear later. All these empires display this quasi-stable, inegalitarian, tendency ... Eventually, referring to previous empires, the economic and social ideologies of these states had so deterioriated the efficiency and defensibility of the states, that what had been insignificant border states rose to overtake them." (p. 33)

"This evolutionary principle applies to states as well as organisms. Thus, in the ancient world, the various contradictory Greek philosophies, ... each of which individually represented a society-threatening ideology, came to be taught in all western academies ... to lead students to exaggerate the likelihood of unlikely hypotheses." (p. 34)

=> How can society ever evolve a vital institution ? .. If a new organism is truly vital, how can its society or organism ever have survived without it ?" (p. 35)

"Learning from the sufficiently impressive .. successes of experimenting states plausibly leads other experimenting states to attempt to durable achieve the higher level of efficiency ... complementing their own introduction of new non-vital institution with additional institutional innovations ... Democracy, our central non-vital institution is .. significantly more efficient than authoritarian government." (p. 36)

"After territorial organisms emerged around 500 million years ago, the direction of innovation rapidly switched from cost reduction to aggression and defense." (p. 38)

'Territorial societies incur analogously wasteful arms races. Empires avoid such races, but have eventually, predictably, fallen via economic ideologization." (p. 39)

"Both WWI and WWII showed he leading combattants the immense cost of competitive imperialism ... The pragmatic response of the imperialists was to substantially free their old colonies while correspondingly shifting most of the defense responsibilities to them." (p. 39) ... "This required the emergency-financial advantages of some form of gold standard in order to defend themselves. Such vital institutions were soon formalized for third-world countries by adopting the international gold standard created at Bretton Woods in 1944." (p. 40)

Brutocracy

Earl A. Thompson:

If the leadership contest is endogenously determined:

"If there are few contestants [in the fight for power], then the rational winner adopts values of benevolence towards rivals in order to reduce their resistance to his or her leadership. It is similarly rational for the rivals to adopt values of respect for the leader, or 'civil reverence', in order to maintain their favored positions in the social hierarchy .. If .. there are many contestants, .. the winning leader cannot afford to be generous to all rivals ... In this case, the winner is the person who adopts the cruelest values, the greatest psychological willingness to physically punish alternative leaders for small transgressions. The latter, 'brutocratic' sort of society can be empirically identified by political imprisonment and torture." (p. 41)

Brutocracy creates high defense externalities because capital accumulation by members of the favored ruling class threatens the existing leader .. Additional national defense expenditures must be provided to defend against these internal threats against capital in brutocratic countries. So efficient income tax rates in such countries are abnormally high. So are tariffs. The Early Nation-State period (15th through 17th cy), saw not only a great escalation of political torture and brutality ... it also saw extremely high domestic regulation and tariffs, i.e. efficient mercantilism." (p. 41)

"Brutocracy, which similarly characterizes most third-world countries, is a substantial economic liability. This is not only because it entails a higher defense cost and thus taxation. It also breeds civic irreverence and corrupt bureaucracies that militate against effective democracy and hence the elimination of underdevelopment traps." (p. 42)

Externally Imposed Trade Liberalization

* First Order Dependency and Hyper-Repression

"The country (like the typical Central-American country) is so dependent on the dominant countries that it cannot independently chose its own legislators ... Political repression is necessary. .. Dependent countries who are more independent than first-order dependents are able to chose their own leaders, and with some exceptions, their own economic policies. Critical here is the country's ability to adopt substantial exchange controls in response to an external imposition of free trade." (p.43)

* Second Order Dependency and Hyper-Savings

"The second order dependent is so dependent on the dominant countries that it is explicitely prevented from employing exchange controls. The second-order dependent must therefore respond in a unique way to an externally imposed elimination of its tariffs ... (p. 43) ... A second order dependent creates an artificial scarcity of foreign currency and thereby restricts imports by artificially importing non-coveted capital. An artificial government demand for foreign currency creates an artificially cheap domestic currency and corresponding export boom. .. With the 'economic miracles' induced by this policy (Japan, Germany, the 'baby tigers'_ substantially suffer from a grossly excessive degree of consumptive sacrifice, the beneficiaries are the dominant countries." (p. 44)

* Third Order Dependency and Hyper-Inflation

A third order dependent efficiently employs exchange controls in order to avoid the excessive importation of consumer durables occasioned by the external imposition of artificially low tariffs .. Dominant countries will react to this subversion of their policy intentions. The IMF insists on a devaluation to a realistic, market-clearing exchange rate; otherwise, the dependent will not receive its upcoming IMF loan extension. .. These countries still have a way to prevent a corresponding increase in trade: they can increase their money supplies." (p. 44)

* Fourth-Order Dependency and Costly Social Revolution

"A fourth-order dependent has sufficient potential independence to possibly avoid the above-described costs by operating independently of the international agencies. Such states may have a strong religious ideology enabling them to defend themselves without the aid of Western institutions. This occurs in the Middle East. Elsewhere, .. the process of acquiring independence is more difficult. What is generally required is an experience-based reaction against laisser-faire ideology. ... The nation, although militarily strong enough to defend itself against external takeover, can no longer defend itself against alternative internal ruling groups. The revolution comes from those who fail to benefit from the excessive accumulation of real capital, i.e. from a coalition of disaffected segments of the ruling class and an army of perennially oppressed masses. An anti-trade ideology is necessary to combat the initiating ideology and motivate the masses by arming them with both a sense of injustice and an over-optimistic estimate of the personal benefits from a new regime." (p. 46) ... Once the costly social revolution is achieved, the reality sets in that communism is at least as costly a peacetime economic ideology as laisser faire." (p. 47)

Conclusion

"We thus find that virtually all of the unique economic phenomena arising soon after the ends of WWI and WWII are attributable to the ideologically inspired attempt to impose free trade on the many dependent nations arising after those wars." (p. 47)