Erm, this one is interesting

So Prof. Tim Besley of the London School of Economics, former All Souls Prize Fellow, ex-member of the Bank of England’s Monetary Policy Committee, the UK’s third most respected economist, and all-round impressive smart guy, has a new paper with Marta Reynal-Querol at the Universtat Pompeu Fabra in Barcelona.

I mention these credentials to emphasise how respected and mainstream these guys are before I mention the finding of their paper, entitled “The Logic of Hereditary Rule: Theory and Evidence” (pdf, seems to be quite an early working paper), which is that hereditary rule/monarchy outperforms democracy but only when the hereditary ruler is subject to few constraints on their power.

Hereditary leadership has been an important feature of the political landscape throughout history. This paper argues that it can play a role in improving economic performance when it improves intertemporal incentives. We use a sample of leaders between 1848 and 2004 to show that economic growth is higher in polities with hereditary leaders but only when executive constraints are weak.

This finding is mirrored in policy outcomes which affect growth. There is also evidence that dynasties end when the economic performance of leaders is poor suggesting that hereditary rule is tolerated only where there are policy benefits. Finally, we focus on the case of monarchy where we find, using the gender of first-born children as instrument for monarchic succession, that monarchs increase growth.

That is: hereditary monarchs with lots of legal power choose better policy than other systems do, including democracies, non-hereditary dictators, and weak hereditary monarchs, and this is reflected in higher growth.

The size of the coefficient suggests that, in a country with weak executive constraints, going from a non-hereditary leader to an hereditary leader, increases the annual average economic growth of the country by 1.03 percentage points per year.

That’s a really really big difference.

Of course, they’re not saying they actually favour hereditary monarchy!

Although we have tried to understand the logic of hereditary rule, we do not regard the findings of the paper as supporting the institutions of hereditary rule. There are many arguments against, going back at least to Paine (1776), about the inherent injustice in such systems. Moreover, the fact that many polities around the world have put an end to hereditary rule and establish strong executive constraints is no accident since this is arguably a much more robust way to control leaders than relying on the chance that succession incentives will safe-guard the public interest.

It depends what you want government to do. If it’s just there to guarantee a basic framework for society then as long as it worked, some sort of non-democratic system might be OK. Our having a stake in the electoral process hardly guarantees good governance (perhaps the opposite).

But lots of people value democracy not just because they think it gives us good policy: being part of a community; as an expression of human equality; an important type of positive freedom. These pragmatic arguments for and against different governance systems are not going to fully convince those types (and that’s fair enough).

Of course the bigger issue is that the paper could easily be proved wrong in the review process, that’s the point of interesting conjectures in working papers. And there’s a whole lot of other literature out there, some of which goes against Besley and Reyna-Querol’s work. But I tend to think that monarchy vs democracy is an empirical question. Whatever makes us freer, happier, richer is best.

We’re rather confused about these anti-discrimination laws

No, not about the idea that people shouldn’t discriminate except where it is rational to do so. If that’s the way that people want to be then so be it. Rather, we’re confused about the fact that people keep calling for laws on this basis.

Note that this nothing at all to do with things like Jim Crow: that was a series of laws to force people to discriminate. Or, if you prefer, it’s everything to do with Jim Crow: for as Gary Becker pointed out the reason for those laws was the thought that in the absence of them then people would not discriminate in the manner that the racists thought everyone should. Showing that left alone people might well be able to rub along quite happily, even if not perfectly.

But we go a bit further than that in these cases of gay wedding cake refuseniks and the like. There’s at least two possible reactions to that sort of discrimination. The first is obviously the law. But we’re rather large believers in the idea that markets (and yes, social pressure and reaction is a market in this sense) are rather more powerful. To refuse to serve a potential customer because of race, gender, sexuality or any other such irrelevance is of course to be displaying a socially (in this society, the one we’re in, in general) undesirable prejudice. And the question then becomes, well, what should be done about it?

Well, if it actually is a socially not desired prejudice being declared then we’d expect there to be some social and or economic consequences of it being expressed. People not using that supplier for example even if without any direct boycott being organised. That supplier going bankrupt as a result of not gaining custom perhaps.

Let us be serious for a moment: any pub which displayed the notorious no dogs…(insert prejudices of choice here) sign would be out of business within weeks. It’s therefore not obvious that we actually need a law stopping people from posting such signs.

Another way of looking at the same point is that a society where it’s possible to gain majority support for laws banning such signs is fairly obviously a society in which social and business pressures would stop people from displaying that sort of prejudice anyway. So we’re left really rather wondering what is the point of the laws in the first place.

Economic Nonsense: 36. It is important to ensure that the finest minds are directing the economy

This commits the Platonist fallacy of supposing that the problem is to find the wisest, noblest rulers.  The assumption behind it is that we will come out best if only the right people end up in charge.  In “The Open Society and its Enemies,” Karl Popper exposes the fallacy.  The problem is that that whatever method we choose to select our rulers, those rulers can easily be corrupted in office.  The temptations of power are all too obvious.

If we did manage to have the finest minds in charge of the economy, the odds are high that they would direct it to serve ends they approved of, rather than the ends that ordinary people would freely choose if they had the opportunity.  

But there is a deeper fallacy.  It is that any minds, no matter how fine, can have sufficient information and act quickly enough to direct the economy.  The economy is changing from micro-second to micro-second as choices are made, decisions reached and actions taken.  These all input into the flow of information conveyed by prices and deals.  The economy is not like a vehicle that can be controlled by accelerators, brakes and steering wheel.  It is more like a living organism in its complexity and its ability to adapt to changing circumstances.  The odds are that if the finest minds were to direct the economy, they would direct it badly. 

Popper’s answer was not to ask, “How can we choose or train the best rulers,” but to ask instead, “How can we so organize political institutions that bad or incompetent rulers can be prevented from doing too much damage?”  His answer was that you need a means of rejecting the bad, rather than selecting the good.  In the economic sphere this happens without the direction of the finest minds.  Products that do not cut it with consumers are counted out, along with the firms that market them.  Capital is redeployed to the newer, smarter people who can satisfy customers.  It is a continuous process by which the less competent is weeded out in favour of the more competent.

If we did have the finest minds trying to direct the economy, the chances are that they would contrive to stop this happening, or at the very least, interfere with it in ways that made it less effective.

The Observer seems remarkably confused about Chinatown this morning

Apparently rents are going up in Soho’s Chinatown enclave. The Observer seems very confused indeed about this:

The doubling and more of rents and the pressure to convert restaurant space into residential property are causing long-established family businesses to close, social networks to break up and generic catering businesses with more financial muscle to move in. A famous and attractive manifestation of London’s celebrated diversity will dilute and fade.
Big trouble in little Chinatown as rent rises force restaurant owners out
Read more

Other examples include threats to markets and industrial space in other parts of the city, to the music shops of Tin Pan Alley, much-loved clubs or independent-spirited restaurants. There are the squeezing out of small but useful shops and other businesses, the city’s inability to house its poor, the exclusion by house price of the people who provide its services, from cleaners and carers to the designers and creatives who are said to add so much to London’s international lustre.

It is confused to both complain about the shortage of residential space and also about the conversion of commercial space to residential space in the same city, isn’t it? But the real problem of course is the headline:

The Observer view on the threat to London’s Chinatown: its loss will be no one’s gain

Well, let’s see. The landlords will gain, they will be getting more money for their property. But that’s not all: all of the users of the properties will gain as well. If the value in use of some part of Soho was greater as a chop suey house than as a house then the chop suey place would produce a higher valuation for the property. We thus don’t need an agonised “conversation” about what provides the greater value. We only have to go and look at the prices. If the price is higher as a not chop suey house, which is what The Observer is complaining about, then quite obviously all of the users of that joint value the joint at a lower value than the alternative use.

After all, this is the very definition of societal wealth creation: moving an asset from a lower to a higher valued use.

It may well be that some looking for a cheap chow mein will be disappointed at not being able to get one from that now residential building. But if the customers in aggregate were in fact willing to pay the amount needed to keep the restaurant in place then it would still be in place, wouldn’t it?

The democratic cycle

Just as the business cycle seems to punctuate times of economic growth with periods of stagnation or recession, so there appears to be a political cycle in democratic countries, a cycle that features times of economic consolidation and progress with those of profligacy, deficit and debt.

In some countries a centre right government coming into office institutes policies that rein in spending and encourage the growth of the private economy. Supply side policies aid business development and expansion, and tax cuts increase rewards and act as incentives to economic expansion.

The growth that often follows the policies can lead to the re-election of the government that implemented them. The feel-good factor of improving standards, higher wages and inflation under control can enable such a government to secure re-election.

Memories are short, however, in the democratic cycle, just as they are in the business cycle. People come to take wealth and growth for granted, and to be less prepared to continue with the policies that led to them. People grow careless and are more ready to take political risks.

Quite often a party that proposes to concentrate on distributing the new-found wealth rather than on continuing to grow it, appeals to the electorate more than the one whose policies helped bring it about.

The centre-right government is replaced by one that leans more to the left. It sets about expanding benefits and growing the public sector. It tries to exact more from private business by increasing taxes. It needs to fund new programmes and borrows money in order to do so. For a time its largesse is appreciated, but increasingly investment and business find it harder to flourish in the new environment it has created.

Growth slows down, the economy grows sluggish. People begin to feel less secure and less wealthy. They begin to question the competence of ministers who seem unable to manage the economy. The left-leaning government sometimes wins its first re-election after a term in office, but often with less enthusiasm than that which first put it there.

The economy stagnates under the impact of inappropriate policies, and a centre-right government is sometimes then elected to clear up the mess. It implements the policies that encourage investment, applies fiscal responsibility, and makes it easier and less costly for firms to take on new employees. Gradually the economy recovers, and the democratic cycle begins once again.

It might be a feature of democratic societies that whenever wealth and growth are created, a popular party will eventually secure election on the basis of promises to redistribute that wealth. The less well-off can always outvote the more well-off. It means that instead of a steady continuation of policies that allow the economy to grow, there is more likely to be a staccato, with periods that help the economy alternating with those that stunt it. This is more about politics than it is about economics.