Sunday, June 9, 2013

Hayek, Polyani, and Why Nations Fail

Once upon a time I finished the books I started, but like most students, I was poisoned in college by impossible quantities of "required" reading.  I learned freshman year that it was better to skim a bit of Foucault, read an essay of Hume's, and a digest a passage or two of Aristotle's than to read one, or to read all and sacrifice my social life.   By now my personal pile of partially digested books would surely reach my third-floor window, if properly stacked. 

For most books, just a taste is enough.   But other books, once tasted, linger in your stomach and demand full treatment.  Unfortunately these books also usually take the longest to read. I can read a bad book in a few hours. A good book will take me a week. A great book can take me a year. 

In the past couple weeks, I finally managed to finish a couple great books and one good book. I read Frederich Hayek's The Road to Serfdom for the first time from start to finish, having only skimmed when I was required to read it for class; then I killed off the last few chapter's of Karl Poyani's The Great Transformation, a book that defies scanning and demands completion; finally, inspired by my success, I polished off the remaining 2/3 of Daren Acemoglu & James Robinson's Why Nations Fail.

The three books have many differences: Hayek, Acemoglu and Robinson wrote to convey a few key points to a broad audience, and their books are eloquent but plainly written. Polyani wrote for scholars, and, expecting more from his reader, his work contains contains more references and covers more ground.  Acemoglu and Robinson wrote from firmly within the mainstream, Hayek from just outside it, and Poylani from the minority. Polyani, Acemoglu and Robinson ground their arguments in the grand scheme of history, and Hayek relies primarily on logic and a few (important) examples.  Hayek and Polyani wrote during World War II, and both imbued their books with the gravity and consequence of the time. Robinson and Acemoglu published their book only last year, and while they obviously care about their conclusions, they did not write with the urgency of Hayek or Poylani who saw words as the only weapon they had to fight for the world crumbling around them.  Hayek's and Polyani's  books are universally recognized as great. Acemoglu's and Robinson's book may become great (although statistically, the chances are pretty slim). 

All three books however, strike at the heart of political economy. Polyani, Acemoglu and Robison's subtitles probably encapsulate the topic best: The Political and Economic Origins of Our Time, and The Origins of Power, Prosperity and Poverty, respectively (Hayek didn't have a subtitle, and in truth his scope was somewhat narrower). All authors make sweeping arguments on a scale rare for experts.  I'll try to summarize them as best I can, in order of publication: 
  • Hayek argues that economic planning, or "collectivism" is essentially incompatible with progress, because it is economically less efficient than market organization and also because it inevitably leads to the growth of arbitrary power, and encroachment on individual political rights. Hayek argues for "individualism," a return to more or less classic liberalism with a small state that encourages only institutions that support competition.  
Hayek says no 
  • Poyani argues that at the root of the the great conflicts of the first half of the 20th century lies a double movement between the expansion of the market economy, including the unnatural commoditization of land, labor, and money, and the interests who seek to defend traditional "habitation." Displacement and inequality caused by the market economy is often unbearable, but incomplete attempts to correct and protect can be even worse. 
  • The great and endless battle
  • Acemoglu and Robinson argue that the wealth and poverty of nations is primarily determined by political institutions. Political and economic centralization is a first step, and from centralization growth proceeds either slowly under "extractive institutions," or quickly under "inclusive institutions." History is not determinate, but highly contingent on key "critical junctures." 
Just add Magna Carta 
While the four authors each approach the essential problem of political economy from a different angle, use different language to describe the same phenomenon, and do not directly address each other's ideas, they are comparable. You can see the similarities in this table (click to enlarge): 

Especially alike are Hayek, Acemoglu and Robinson's conception of Rule of Law, although Acemoglu and Robinson may have been inspired largely by Hayek, and Polyani, Hayek, Acemoglu and Robinson's conception of the main problem with markets, although the Polyani and the others disagree on the magnitude of the problem. Little things also overlap; for example, Acemoglu and Robinson give many examples of Kings and Queens actively preventing technological advance for fear of creative destruction, and Polyani also notes that the monarchy often aligns with habitation in the double movement. It seems to me that all four authors are talking about two great essential ills: 
  • Uncertainty: If people don't believe that they will be able to keep the fruits of their labors, either because of an appropriative state or because of general lawlessness, they won't invest or produce and the economy will stagnate
  • Disruption: Progress and innovation in an unregulated market will inevitably and unfairly destroy some people's livelihoods and or change the balance of power

Although the three books have many similarities, they each also treat on a slightly different aspect of political economy. Acemoglu and Robinson trace the evolution of institutions and economies over time, and attempt to describe a general pattern of progression. Polyani focuses on the reasons why that progression is contested, and does not always happen. Hayek focuses on just the tail end of Acemoglu and Robinson's grand scheme, arguing that attempts to progress forward through planning can only lead to disaster. 

As usual, I tried to put what I had learned into a picture. It's certainly a bit wacky, and I don't really expect it to make sense to anyone else (like most of my pictures), but for me it's a helpful mash up of the four author's thoughts.  The arrow on the left swings from individualism back to decentralization because Hayek argued that if you can't create pro-competitive institutions that deal with the problem of disruption, it's usually best to leave it be (lassiez-faire, although he rarely says it). I see laissez-faire essentially as decentralization, and indeed, Hayek is often categorized as a libertarian by modern commentators. Thus either extreme of the spectrum between individualism and collectivism will lead backward, and societies can only stay at high growth inclusive institutions by carefully walking the line. 

Of course, always a spectre is haunting political economy- the spectre of Marx.  (Disclaimer, I haven't read Marx front to back yet; if a great book takes me a year, Das Kapital will probably take me a decade...) To me, Acemoglu & Robinson's stage-based description of the evolution of institutions smacks of historical materialism; decentralization is akin to primitive communism, extractive institutions parallel the Slave Society and Feudalism stages, and inclusive institutions parallels capitalism. Of course, Marx predicted that the next stage after capitalism would be socialism, and in the image above it certainly would be natural to add a fourth arrow.  However Hayek's argument makes clear that societies cannot push through to socialism through brute force, because the planning required inevitably sends society back to extraction. Nor, according to my Hayek add-on, can paradise be achieved through perfect individualism, because that sends society only further backward. 

So how can society move forward? 

It was perhaps a little unfair of me to categorize inclusive institutions as "preventing uncertainty" and extractive institutions as "preventing disruption" above. I essentially agree with Acemoglu & Robinson that inclusive institutions are superior to extractive institutions in basically every way, including preventing disruption; theoretically with inclusive institutions all citizens should be able to appeal for a better life, shaping the rules until the rules suit everyone.  Drawing from Polyani, one can imagine inclusive institutions as the trucemaker in the battle between habitation and improvement. True, Kings may have defended traditional livelihoods from Capitalists from a time, but truly inclusive institutions cannot be captured for the benefit of certain interests at the cost of others.  I optimistically believe that there is a set of institutions both prevents uncertainty and prevents disruption. Hayek's arguments make it clear that this set of institutions cannot be developed quickly without falling too far toward either collectivism or individualism. So for me progress becomes a slow push toward ever more perfect institutions. And if you compare today with 1950 years ago, you can clearly see that slowly but surely most developed states have been pushing towards socialism.  

Come to think of it, that's more or less what I believed before I read these books, so perhaps I'm just being stubborn. One thing's for sure; when Danerys wins back the 7 kingdoms she should definitely sign the Magna Carta.


  1. Enjoyed this a bunch. Definitely found the pictures a bit confusing, but I also haven't read the source text. Why do you agree with Acemoglu & Robinson that we should want to prevent disruption? I don't want to take you out of context, but this doesn't seem like the best part of the inclusive institutions idea from your description. For instance, great institutions might only be possible in an environment of disruption (perhaps genuine threats make them behave better). And perhaps a good inclusive culture can persist even while institutions themselves don't.

    Does this make sense? I'm not sure I understood everything clearly since I'm not familiar with the books.

  2. This comment got a little out of hand. I'm still mussing with ideas in my head.

    So when I'm thinking about "disruption" I'm thinking about, for example, outsourcing putting factory workers with no other skills out of a job, or to give Polyani's famous example, when English land reform in the 16th and 17th centuries created thousands of paupers by pushing peasants, who were legally squatters but had lived their for generations, off the land. (they wanted the land for sheep). The former example of course creates efficiencies, and the latter provided the urban density and raw wool that would help catalyze the industrial revolution, but both really suck for the displaced people at the time. Financial crises and recessions would also probably fall into Polyani's definition of "disruption."

    I think that Hayek, Acemoglu and Robinson basically think that "preventing uncertainty" is a lot more important than "preventing disruption" of this type, and they really just casually mention that disruption may have downsides. Polyani's the only one who really sees disruption as a problem, and argues that there needs to be more provision for the displaced factory workers, peasant farmers and the victims of crises, what he calls "embededness" of the market in society. Polyani stays pretty high and lofty on what "embededness" actually is, but tangibly it's things like unemployment insurance, subsidized job training, a federal reserve with a dual mandate for price stability AND employment.

    My point about inclusive institutions is that if they were truly inclusive, they should theoretically serve everybody, and would over time evolve to both to create that "embeded" social net and also to foster innovation. Many people would be pessimistic and say a single set of institutions can never serve both ends; the people who support innovation at the cost of disruption tend toward the right and the people who seek to smooth disruption at the cost of innovation tend toward the left. If the left and the right keep each other in check, and the actual set of institutions (might as well define institutions narrowly as laws) evolves painfully slowly, but evolves balancing individualism and collectivism, habitation and improvement, disruption and uncertainty.