Thursday, November 11, 2010

Thinking about the next chapter in our political and economic institutional development

Susan Hockfield, on the Charlie Rose show, called for the people of the United States "to invent the next chapter of democratic capitalism". She is the President of MIT and judging by this interview, one very smart lady.

The democratic capitalism that this country started with in the 18th century was by current standards neither very democratic nor very much involved in capitalism. Slavery was pervasive, Native Americans were disenfranchised, women were not enfranchised, and only a small portion of the adult males of European origin were empowered to participate in democratic processes; elections were often indirect rather than direct. There were no large corporations, nor the legal institutions to allow them to form, nor was there a stock market; a great many of the people living in the region were involved in subsistence farming or hunting and gathering.

In the more than two centuries since the nation was founded, our political institutions have evolved, sometimes taking a step back and sometimes with bloodshed, but few of us would go back to a system without parties, with the authority of the Supreme Court undefined, or with suffrage constrained to a tiny minority of the population. Nor would many give up the affluence bought not only by two generations of labor but also be the development of institutions and policies that made our economy work so well for most of the last half century. The metaphor of chapters in the history of our political system and of our economic system is a good one.

It is also clear that political institutions and economic institutions have been closely intertwined during our history, from the debates over the national bank in Washington's cabinet to the role of capitalists in the last election as the rules on campaign finance were relaxed.

I would however take issue with the word "invent". I think history suggests that our political institutions and our economic institutions evolve. While there are brilliant people who deeply influence that evolution, no one controls it to such a point that they ought to be said to invent the new institutional system. Indeed, it is hard for me to conceive of someone perceiving the shape of the institutions that will emerge later in this century from the current evolution; where then is the "inventing" in the absence of reasonably accurate prediction and forecasting?

The need for a new chapter seems obvious. The economic crisis of the last few years of exceptional depth and a political process that seems deadlocked are perhaps small signs of the change that is coming.  There are more fundamental indications. We have seen a historically recent demise of alternative institutional systems such as fascism and communism. In the past the evolution of political and economic institutions has been greatly influenced by the philosophical, political and economic ideas of the time and we are in period of great intellectual ferment. Technological change has driven institutional change and we are in the midst of technological revolutions, especially of an Information Revolution. Globalization too is likely to drive both economic and political institutional change.

Implicit in President Hockfield's comments was a recognition that if we do not manage a transition to a political and economic system that improves our lives we may see a transition to a system that is destructive to our deeply held values. Decolonization resulted in a transition for the imperial powers that undermined their ideas about their just positions in the international political and economic orders, not to mention a challenge to their beliefs in their "civilizing missions".

The problem is how to go about influencing the institutional evolution. The American Revolution and the Civil war effected major transitions at the cost of war and dislocation of millions. The industrial revolution saw economic dislocation leaving millions to suffer as slum-inhabiting wage slaves. Two world wars and a great depression resulted in radical change in the 20th century in political and economic institutions. There are worse examples, such as those in Collapse: How Societies Choose to Fail or Succeed by Jared Diamond -- societies that reached the carrying capacity of their environments is propitious environmental conditions and then crashed when the climate changed, to a much lower level of wellbeing and indeed to a reduction in population levels.  All these examples illustrate how painful institutional evolution can be. So how then can we ameliorate the process of change while working towards more rather than less desired institutional outcomes?

As I think of Washington, Lincoln and Franklin Delano Roosevelt, it seems to me that the election of leaders with character and strong ideals as well as "first-class temperament". Hitler and Stalin suggest that leaders can have a very negative effect on institutional transitions.

What are the indicators of a successful evolution of political and economic institutions. I would postulate that a key indicator would be welfare, in the sense of welfare economics -- the greatest good for the greatest number if you will. I would weigh heavily saving a life or pulling people out of extreme poverty against increasing the prosperity of the already wealthy. I would prefer an improvement made earlier to one of the same impact made later.

That suggests that the process of evolution should be open and democratic. Not only is a process with more participants likely to better distribute welfare, but the more open the economy the more likely it will grow quickly.

It also seems to me that a focus on knowledge and technology is important. The greater the knowledge about political and economic systems, the more likely the evolution will be toward more effective systems. Rapid technological innovation is likely to drive increased productivity and is certainly necessary to respond effectively to changes in resource costs and changing factor prices.

It also seems to me that institutions should grow in scale to meet the increased scale possible with improved transportation and communication technologies and infrastructures, with globalization, and with the increased environmental footprint of our global society.

Democratic oversight of a complex evolutionary process of economic, political, technological and environmental change involving an expansion of the scale of political and technological institutions seems to me to require an informed and thoughtful public. Thus, I would put the expansion of formal and informal education as a key element in achieving an evolution to a new chapter in our economic and political institutions that achieves the best outcomes in terms of human welfare.

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