Dictatorship Democracy and_Dev

 

This last consideration makes it clear why the assumption that the democracy is governed by an encompassing interest can lead to much-too-optimistic predictions about many real-world democracies. The small parties that often emerge under proportional representation, for example, may encompass only a tiny percentage of a society and therefore may have little or no incentive to consider the social cost of the steps they tak~ on behalf of their narrow constituencies. The special interest groups that are the main determinant of what government policies prevail in the particular areas of interest to those interest groups have almost no incentive to consider the social costs of the redistributions they obtain. A typical lobby in the United States, for example, represents less than 1 % of the income-earning capacity of the country. It follows from the reciprocal rule that such a group has an incentive to stop arranging further redistributions to its clients only when the social costs of the redistribution become at least a hundred times as great as the amount they win in redistributional struggle (Olson 1982).

It would therefore be wrong to conclude that democracies will necessarily redistribute less than dictatorships. Their redistributions will, however, be shared, often quite unequally, by the citizenry. Democratic political competition, even when it works very badly, does not give the leader of the government the incentive that an autocrat has to extract the maximum attainable social surplus from the society to achieve his personal objectives.

LONG LIVE THE KING

We know that an economy will generate its maximum income only if there is a high rate of investment and that much of the return on long-term investments is received long after the investment is made. This means that an autocrat who is taking a long view will try to convince his subjects that their assets will be permanently protected not only from theft by others but also from expropriation by the autocrat himself. If his subjects fear expropriation, they will invest less, and in the long run his tax collections will be reduced.

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To reach the maximum income attainable at a given tax rate, a society will also need to enforce contracts, such as contracts for long-term loans, impartially; but the full gains are again reaped only in the long run. To obtain the full advantage from long-run contracts a country also needs a stable currency. A stationary bandit will therefore reap the maximum harvest in taxes-and his subjects will get the largest gain from his encompassing interest in the productivity of his domain-only ifhe is taking an indefinitely long view and only if his subjects have total confidence that their "rights" to private property and to impartial contract enforcement will be permanently respected and that the coin or currency will retain its full value.

Now suppose that an autocrat is only concerned about getting through the next year. He will then gain by expropriating any convenient capital asset whose tax yield over the year is less than its total value. He will also gain from forgetting about the enforcement of long-term contracts, from repudiating his debts, and from coining or printing new money that he can spend even though this ultimately brings inflation. At the limit, when an autocrat has no reason to consider the future output of the society at all, his incentives are those of a roving bandit and that is what he becomes.lO

To be sure, the rational autocrat will have an incentive, because of his interest in increasing the investment and trade of his subjects, to promise that he will never confiscate wealth or repudiate assets. But the promise of an autocrat is not enforceable by an independent judiciary or any other independent source of power, because autocratic power by definition implies that there cannot be any judges or other sources of power in the society that the autocrat cannot overrule. Because of this and the obvious possibility that any dictator could, because of an insecure hold on power or the absence of an heir, take a short-term view, the promises of an autocrat are never completely credible. Thus the model of the rational self-interested autocrat I have offered is, in fact, somewhat too sanguine about economic performance under such autocrats because it implicitly assumed that they have (and that their subjects believe that they have) an indefinitely long planning horizon.

Many autocrats, at least at times, have had short time horizons: the examples of confiscations, repudiated loans, debased coinages, and inflated currencies perpetrated by monarchs and dictators over the course of history are almost beyond counting.

Perhaps the most interesting evidence about the importance of a monarch's time horizon comes from the historical concern about the longevity of monarchs and from the once-widespread belief in the social desirability of dynasties. There are many ways to wish a king well; but the king's subjects, as the foregoing argument shows, have more reason to be sincere when they say "long live the king." If the king anticipates and values dynastic succession, that further lengthens the planning horizon and is good for his subjects.

 

The historical prevalence of dynastic succession, in spite of the near-zero probability that the son of a king is the most talented person for the job, probably also owes something to another neglected feature of absolutisms. Any ruler with absolute power cannot, by definition, also have an independent source of power within the society that will select the next ruler and impose its choice upon the society. An independent capacity to install a new ruler would imply that this capacity can be used to remove or constrain the present autocrat. Thus, as is evident from modem dictatorships in Africa and Latin America, most dictatorships are by their nature especially susceptible to succession crises and uncertainty about the future. These uncertainties add to the problem of short time horizons that has just been described. In these circumstances, it may be advantageous to a society if a consensus emerges about who the next ruler will probably be, since this reduces the social losses arising from the absence in an autocracy of any independent power that could ensure a smooth succession. Given autocracy, then, dynastic succession can be socially desirable, both because it may reduce the likelihood of succession crises and because it may give monarchs more concern for the long run and the productivity of their societies.

DEMOCRACY, INDIVIDUAL RIGHTS, AND ECONOMIC DEVELOPMENT

We have seen that whenever a dictator has a sufficiently short time horizon, it is in his interest to confiscate the property of his subjects, to abrogate any contracts he has signed in borrowing money from them, and generally to ignore the long-run economic consequences of his choices. Even the ever-present possibility that an autocracy will come to be led by someone with a short time horizon always reduces confidence in investments and in the enforcement of long-run contracts. What do the individuals in an economy need if they are to have the maximum confidence that any property they accumulate will be respected and that any contracts they sign will be impartially enforced?

They need a secure government that respects individual rights. But individual rights are normally an artifact of a special set of governmental institutions. There is no private property without government! In a world of roving bandits some individuals may have possessions, but no one has a claim to private property that is enforced by the society. There is typically no reliable contract enforcement unless there is an impartial court system that can call upon the coercive power of the state to require individuals to honor the contracts they have made.

But individuals need their property and their contract rights protected from violation not only by other individuals in the private sector but also by the entity that has the greatest power in the society, namely, the government itself. An economy will be able to reap all potential gains from investment and from long-term transactions only if it has a government that is believed to be both strong enough to last and inhibited from violating individual rights to property and rights to contract enforcement. What does a society need in order to have a government that satisfies both of these conditions?

Interestingly, the conditions that are needed to have the individual rights needed for maximum economic development are exactly the same conditions that are needed to have a lasting democracy. Obviously, a democracy is not viable ifindividuals, including the leading rivals of the administration in power, lack the rights to free speech and to security for their property and contracts or if the rule of law is not followed even when it calls for the current administration to leave office. Thus the same court system, independent judiciary, and respect for law and individual rights that are needed for a lasting democracy are also required for security of property and contract rights.

As the foregOing reasoning suggests, the only societies where individual rights to property and contract are confidently expected to last across generations are the securely democratic societies. In an autocracy, the autocrat will often have a short time horizon, and the absence of any independent power to assure an orderly legal succession means that there is always substantial uncertainty about what will happen when the current autocrat is gone. History provides not even a single example of a long and uninterrupted sequence of absolute rulers who continuously respected the property and contract-enforcement rights of their subjects. Admittedly, the terms, tenures, and time horizons of democratic political leaders are perhaps even shorter than those of the typical autocrat, and democracies lose a good deal of efficiency because of this. But in the secure democracy with predictable succession of power under the rule of law, the adjudication and enforcement of individual rights is not similarly short-Sighted. Many individuals in the secure democracies confidently make even very-long-term contracts, establish trusts for great-grandchildren, and create foundations that they expect will last indefinitely and thereby reveal that they expect their legal rights to be secure for the indefinite future.

Not surprisingly, then, capital often flees from countries with continuing or episodic dictatorships (even when these countries have relatively little capital) to the stable democracies, even though the latter are already relatively well supplied with capital and thus offer only modest rates of return. Similarly, the gains from contract-intensive activities such as banking, insurance, and capital markets are also mainly reaped by stable democracies like the United States, the United Kingdom, and Switzerland. Though experience shows that relatively poor countries can grow extraordinarily rapidly when they have a strong dictator who happens to have unusually good economic policies, such growth lasts only for the ruling span of one or two dictators. It is no accident that the

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countries that have reached the highest level of economic development and have enjoyed good economic performance across generations are all stable democracies. Democracies have also been about twice as likely to win wars as have dictatorships (Lake 1992).

THE IMPROBABLE TRANSITION

How do democracies emerge out of autocracies? It is relatively easy to see how autocratic government emerges and why it has been the predominant form of government since the development of settled agriculture: there is never a shortage of strong men who enjoy getting a fortune from tax receipts. It is much harder to see how democratic government can emerge out of autocracy.

It is a logical mistake to suppose that because the subjects of an autocrat suffer from his exactions, they will overthrow him. The same logic of collective action that ensures the absence of social contracts in the historical record whereby large groups agreed to obtain the advantages of government also implies that the masses will not overthrow an autocrat simply because they would be better off if they did so. Historical evidence from at least the first pharaohs through Saddam Hussein indicates that resolute autocrats can survive even when they impose heinous amounts of suffering upon their peoples. When they are replaced, it is for other reasons (e.g. succession crises) and often by another stationary bandit.^ll What special circumstances explain the cases where a more or less democratic12 or at least pluralistic government emerges out of an autocracy?

One obvious special circumstance is that, partly for the reasons just set out, the richest countries are democracies, and democracies have usually prevailed in the competitions with their major autocratic competitors, whether fascist or communist. The triumphant democracies have sometimes encouraged or subsidized transitions to democracy in other countries. In some cases, such as Germany, Japan, and Italy after World War II, the victorious democracies more or less demanded democratic institutions as. a price for giving independence to the vanquished nations. The theoretical challenge is to explain not these transitions but rather those tha~ are entirely internal and spontaneous.

Easy as it would be to argue that the initially or spontaneously democratic countries were blessed with democratic cultures or selfless leaders, this would be an ad hoc evasion. The obligation here is to explain the spontaneous transitions to democracy from the same parsimonious theory that has been used in the rest of this essay.

The theory suggests that the key to an explanation of the spontaneous emergence of democracy is the absence of the commonplace conditions that generate autocracy. The task is to explain why a leader who organized the overthrow of an autocrat would not make himself the next dictator or why any group of conspirators who overthrew an autocrat would not Vol. 87, No.3

form a governing junta. We have seen that autocracy is a most profitable occupation and that the authors of most coups and upheavals have appointed themselves dictators. So the theory here predicts that democracy would be most likely to emerge spontaneously when the individual or individuals or group leaders who orchestrated the overthrow of an autocracy could not establish another autocracy, much as they would gain from doing so. We can deduce from the theory offered here that autocracy is prevented and democracy permitted by the accidents of history that leave a balance of power or stalemate-a dispersion of force and resources that makes it impossible for anyone leader or group to overpower all of the others.

But this deduction does not give us any original conclusion: rather, it points directly toward one of the major inductive findings in some of the literature in history and in political science on the emergence of democracy. If the theory here is right, there must be a considerable element of truth in the famous "Whig interpretation" of British history and in the explanations of democracy offered by political scientists such as Robert Dahl (1971) and, especially, Tatu Vanhanen (1989). Ifthe theory offered here is right, the literature that argues that the emergence of democracy is due to historical conditions and dispersions of resources that make it impossible for anyone leader or group to assume all power is also right ..

Yet it is also necessary to go back again to the theory for a crucial detail. Even when there is a balance of power that keeps anyone leader or group from assuming total control of a large area or jurisdiction, the leader of each group may be able to establish himself as an autocrat of a small domain. A dispersion of power and resources over a large area can result in a set of small-scale autocracies but no democracy. If, however, the different contending groups are scrambled together over a wide and well-delineated domain, then small autocracies are not feasible. They may not be feasible also if each of the leaders capable of forming a small-scale autocracy believes that a domain of that small scale would not be viable, whether because of aggression by other autocrats or for any reason.

If scrambled constituencies or any other reason rules out division of a domain into miniautocracies, then the best attainable option for the leader of each group when there is a balance of power is power sharing. If no one leader can subdue the others or segregate his followers into a separate domain, then the alternative is either to engage in fruitless fighting or to work out a truce with mutual toleration. The provision of a peaceful order and other public goods will, in these circumstances, be advantageous for all of the groups; thus, the leaders of the different groups have an incentive to work out mutually satisfactory arrangements for the provision of such goods. Given peaceful conditions, there are great gains to leaders and other individuals in each group from being able to make mutually advantageous contracts with others and thereby a common interest in establishing a disinterested and independent judiciary. With several groups, it is not certain in advance how elections will turn out, yet each group can, by allying with other groups, ensure that no one other group will continually dominate elections. Thus elections as well as consensual agreements among the leaders of the different groups can be consistent with the interest of the leaders and members of each group.

 

Though there are a fair number of democracies, there have not been many spontaneous and entirely autonomous transitions from autocracy to democracy. Most of the democracies in the English-speaking world owed a good deal to the pluralism and democracy that emerged in late seventeenth-century Britain and thus they usually do not offer a completely independent test of the argument about the transition to democracy offered here.

Happily, the initial emergence of democracy with the Glorious Revolution of 1689 in England (and its very gradual transition from a democracy with a highly restricted franchise to universal suffrage) nicely fits the logiC of the democratic transition predicted by the present theory. There were no lasting winners in the English civil wars. The different tendencies in British Protestantism and the economic and social forces with which they were linked were more or less evenly matched. There had been a lot of costly fighting and, certainly after Cromwell, no one had the power to defeat all of the others. The restored Stuart kings might have been able to do this, but their many mistakes and the choices that ultimately united almost all of the normally conflicting Protestant and other political tendencies against them finally led to their total defeat.

None of the victorious leaders, groups, or tendencies was then strong enough to impose its will upon all of the others or to create a new autocracy. None had any incentive .to give William and Mary the power to establish one either. The best option available to each of the leaders and groups with power was to agree upon the ascendancy of a Parliament that included them all and to take out some insurance against the power of·the others through an independent judiciary and a Bill of Rights. (The spread of the franchise is too long a story to tell here. But it is not difficult to see how, once the society was definitely nonautocratic and safely pluralist, additional groups could parlay the profitable interactions that particular enfranchised interests had with them-and the costs of suppression that they could force the enfranchised to bear-into a wider suffrage.)

With a carefully constrained monarchy, an independent judiciary, and a Bill of Rights, people in England in due course came to have a relatively high degree of confidence that any contracts they entered into would be impartially enforced and that private property rights, even for critics of the government, were relatively secure. Individual rights to property and contract enforcement were probably more secure in Britain after 1689 than anywhere else, and it was in Britain, not very long after the Glorious Revolution, that the Industrial Revolution began. 13

Though the emergence of a democratic national government in the United States (and in some other areas of British settlement, such as Australia and Canada) was partly due to the example or influence of Great Britain, it also was due in part to the absence of anyone group or colonial government that was capable of suppressing the others. The 13 colonies were different from one another even on such important matters as slavery and religion, and none of them had the power to control the others. The separate colonies had, in general, experienced a considerable degree of internal democracy under British rule, and mat\y of the colonies were, because of the different religious and economic groups they contained, also internally diverse. Many of the authors of the U.S. Constitution were, of course, also profoundly aware of the importance of retaining a dispersion of power (checks and balances) that would prevent autocracy.

THE DIFFERENT SOURCES OF PROGRESS IN AUTOCRACIES AND DEMOCRACIES

Since human nature is profoundly complex and individuals rarely act out of unmixed motives, the assumption of rational self-interest that I have been using to develop this theory is obviously much too simple to do justice to reality. But the caricature assumption that I have been using has not only Simplified a forbiddingly complex reality but also introduced an element of impartiality: the same motivation was assumed in all regimes. The results are probably also robust enough to hold under richer and more realistic behavioral assumptions.

The use of the same motivational assumption and the same theory to treat both autocracy and democracy also illuminates the main difference in the sources of economic growth and the obstacles to progress under autocracy and under democracy. In an autocracy, the source of order and other public goods and likewise the source of the social progress that these public goods make possible is the encompassing interest of the autocrat. The main obstacle to long-run progress in autocracies is that individual rights even to such relatively unpolitical or economic matters as property and contracts can never be secure, at least over the long run.

Although democracies can also obtain great advantages from encompassing offices and political parties, this is by no means always understood (Olson 1982, 1986); nor are the awesome difficulties in keeping narrow special interests from dominating economic policymaking in the long-stable democracy. On the other hand, democracies have the great advantage of preventing significant extraction of social surplus by their leaders. They also have the extraordinary virtue that the same emphasis on individual rights that is necessary to lasting democracy is also necessary for secure rights to both property and the enforcement of contracts. The moral appeal of democracy is now almost universally appreciated, but its economic advantages are scarcely understood.

 

Notes

I am grateful to the U.S. Agency for International Development for support of my research on this subject through my Center for Institutional Reform and the Informal Sector.

There is quantitative evidence from an exhaustive survey of ethnographic accounts showing that references to slaves are virtually absent in the accounts of the very most primitive peoples but rather common in more advanced agricultural societies (Hobhouse, Wheeler, and Ginsberg 1930). Slavery is unprofitable in hunting-gathering societies (Olson 1967).

Small tribes can sometimes form federations and thereby increase the number who can obtain collective goods through voluntary action (Olson 1965, 62-63). Some of the very earliest agricultural societies may have been of this character. But when the number of small groups itself becomes very large, the large-number problem is evident again and voluntary collective action is infeasible.

For citations to much of the best literature extending and testing the argument in The Logic of Collective Action, as well as for valuable new analyses, see Hardin 1982 and Sandler 1992.

This literature is most constructive and interesting, but to the extent to which it tries to explain government in terms of voluntary transactions, it is not convincing. North, while emphasizing transactions costs and contracts, also uses the notion of the "predatory state" and the logic of collective action in his account of the state, so his approach must be distinguished from Barzer s.

For the definition of an encompassing interest and evidence of its importance, see Olson 1982. The logical structure of the theory that encompassing interests will be concerned with the outcome for society whereas narrow groups will not is identical with the logic that shows that small groups can engage in voluntary collective action when large groups cannot.