• ## Autocrats can accelerate growth through cooperation

Institutions as a fundamental cause of long-run growth claims that inclusive societies should, ceteris paribus have greater economic growth than authoritarian ones—in part, because autocrats can’t credibly commit to upholding property rights after productive investment has occurred. If we formalize this argument as a game, we see that the single shot case supports this claim. But once we turn to the (more plausible) repeated game, we see that mutual cooperation is an equilibrium.

### Intro

In (Acemoglu, Johnson, and Robinson 2005) and (Acemoglu and Robinson 2013) (and surely elsewhere), Acemoglu and Robinson contend that inclusive societies have inherent economic advantages over stratified societies. If true, this is quite important; it suggests that, in the long run, we should expect inclusive societies to “win” out1. The moral arc of the universe bends toward justice and all that.

### Scenario

But is it true? As far as I can tell, the best articulation of this claim is in section 6 of (Acemoglu, Johnson, and Robinson 2005). It lays out several claims in support of the argument that oligarchic societies have a structural disadvantage when it comes to economic growth. In this post, we’ll focus on the first:

Imagine a situation in which an individual or a group holds unconstrained political power. Also suppose that productive investments can be undertaken by a group of citizens or producers that are distinct from the “political elites”, i.e., the current power holders. The producers will only undertake the productive investments if they expect to receive the benefits from their investments. Therefore, a set of economic institutions protecting their property rights are necessary for investment. Can the society opt for a set of economic institutions ensuring such secure property rights? The answer is often no (even assuming that “society” wants to do so).

The problem is that the political elites—those in control of political power—cannot commit to respect the property rights of the producers once the investment are undertaken. Naturally, ex ante, before investments are undertaken, they would like to promise secure property rights. But the fact that the monopoly of political power in their hands implies that they cannot commit to not hold-up producers once the investments are sunk.

[…] The consequence is clear: without such protection, productive investments are not undertaken, and opportunities for economic growth go unexploited.

### Counterclaim

Contrary to the claim here, I think a rational and informed autocrat could credibly support economic institutions like property rights. If the autocrat and the producers interact over a non-trivial period of time, producers can condition their behavior on the autocrat’s. That is, the producers can decide that they’ll only invest if the autocrat preserves economic freedoms. If the autocrat expropriates and otherwise abuses the producers, they’ll do the bare minimum (shirk). Knowing this, the autocrat realizes that they can’t simply choose to loot while the producers continue to invest. The autocrat’s choice is between looting a minimal economy and a more restrained taxation of a growing economy. Under the right circumstances, a rational autocrat would do best to choose taxing a growing economy rather than looting a minimal economy.

### Model

#### Single-shot

Let’s model this situation more explicitly to make our claims precise. We can describe it as a two player game. Player one is the $$\text{Autocrat}$$ and player two is the $$\mathtt{Producers}$$2. During the game, the $$\text{Autocrat}$$ must decide to either $$\text{Tax}$$ at a sustainable rate or $$\text{Loot}$$ by taxing at an onerous rate, expropriating and otherwise taking a larger share of the economic output. We represent these actions as fractions of economic output taken by the $$\text{Autocrat}$$ with $$1 \geq l > k \geq 0$$. The $$\mathtt{Producers}$$ must decide to $$\mathtt{Shirk}$$—just get by with a minimum amount of work at a subsistence standard of living—or $$\mathtt{Invest}$$—devote more effort to production in the hopes of future improvements to productivity. The extra cost that producers pay when $$\mathtt{Investing}$$ is represented by $$c > 0$$. In either case, $$\mathtt{Producers}$$ receive whatever fraction of the economic output the dictator doesn’t take—$$1 - k$$ or $$1 - l$$. This is all described more succinctly in the table below:

In this game, Acemoglu’s and Robinson’s claim is correct. $$\text{Tax}\backslash\mathtt{Invest}$$ is not an equilibrium. The $$\text{Autocrat}$$ can always improve their outcome by switching from a strategy of $$\text{Tax}$$ to $$\text{Loot}$$. Similarly, without any opportunity to recoup the increased cost of $$\mathtt{Investing}$$, $$\mathtt{Producers}$$ will always prefer $$\mathtt{Shirking}$$.

• ## Minor blessings of a god emperor

An immortal dictator would have more incentive for increasing long run growth and could thus be more economically liberal.

### Life extension in autocrats

In a recent episode of the 80,000 hours podcast, Bryan Caplan briefly talked about totalitarianism. During that section of the conversation, he dropped this tidbit:

[F]un fact is Stalin actually had a life-extension program dedicated to try to make himself immortal. It didn’t work, but my view that is if it worked, than I think the Soviet Union would still be ruled by Joseph Stalin.

### Incentive alignment

Infinite tyrants sound worse than finite tyrants. But there’s a silver lining: Long tenure in autocrats discourages rapacity.

#### Theory

For the theoretical argument, we turn to (Olson 1993). First, we suppose an autocrat is a rational, economically informed actor trying to maximize their total consumption over their lifetime. Then:

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.

[…]

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.

Beyond limiting expropriation, an immortal autocrat would want to support other economic freedoms that increase long-run growth—as long as they encourage growth more than they imperil the autocrat. Other things in this category might include: the impartial enforcement of contracts and a stable currency.

Recapitulating, an autocrat that orients toward the long run gets to consume more in the long run—as long as they stay in power. All else equal, an immortal autocrat will stay in power longer than a merely mortal autocrat and thus has more incentive to focus on the long run. The good news is that everyone else also gets to consume more and enjoy more economic freedoms along the way.

• ## Hot takes—The Moral Limits of Markets

Last time, I summarized Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets (Sandel 2012). Now, I’ll say my own things instead of regurgitating Sandel (as delicious as premasticated Sandel may be).

Throughout, I’ll try to resist temptation and keep the discussion to the moral failings of markets. There’s a whole vast literature on how and when markets fail on their own terms (i.e. don’t achieve social efficiency) that I’d like to avoid.

Also, I’ve tried to order things for comprehensibility, but there isn’t a single, coherent thesis here. Most of the sections are standalone.

### Markets defined

I think it behooves us to start with a discussion of precisely what markets are. This should clarify and it should help us understand which features of markets are necessary and which contingent.

Without thinking too deeply about it, I’ll say a market is a legal and sociocultural system via which unaffiliated parties may exchange rights—paradigmatically, one party gives up the rights for exclusive use (i.e. property rights) of some tangible good and receives in exchange the rights for exclusive use of some quantity of money. I choose this annoyingly abstract definition to highlight the flexibility and generality of markets which is important when talking about atypical markets.

### Markets vs. property

This definition quickly suggests the importance of distinguishing between markets (the mechanism of exchange) and property (what’s exchanged on the market). Property (or some other bundle of rights) is a precondition to markets. Unfortunately, I think the book rather wholly elides this distinction1.

Many of the ills attributed to atypical markets are more accurately pinned on property. In fact, I can’t think of any examples where ‘propertizing’ (i.e. formalizing and legislating the rights to some formerly fuzzy thing) is okay and market exchange is squicky2. If the market in slaves had been abolished and ownership of slaves could be transferred only by inheritance, chattel slavery would have been no less appalling.

This isn’t pure, idle pedantry. By omitting markets from the story, we highlight that core to the corruption concern is people relinquishing capacities we’d rather they keep. From this perspective, the problem with women agreeing to be sterilized for cash is that they’re relinquishing their reproductive rights while we think they ought to be inalienable; it invites outsiders in to our bodies. “Bank One blast” rankles because our choice of words ought to be our own; to do otherwise is to invite outsiders in to our minds.

We’re then left with the question: Is it best to deny people the capacity to relinquish certain capacities? Morally? Politically?

• ## Summary—The Moral Limits of Markets

Markets continue to expand into areas that were once governed by other mechanisms. But markets can be unfair and they can corrupt the goods allocated by them. Because markets have a moral dimension, their continued expansion means that economic reasoning must explicitly embrace moral reasoning.

I recently read Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets (Sandel 2012). Now, I’ll summarize it1. Next time, I’ll critique it.

### Scope of markets

There is no alternative. Markets are inescapable. But markets now extend beyond the mere exchange of commercial products into “spheres of life once governed by nonmarket norms”.

The book offers many, many (many) examples of this including:

• [I]n 2001, [a] British novelist […] wrote a book commissioned by Bulgari […]. [The author] agreed to mention Bulgari jewelry in the novel at least a dozen times. The book, aptly titled The Bulgari Connection […] more than exceeded the required number of product references, mentioning Bulgari thirty-four times. [One critic] pointed to the clunkiness of the product-laden prose as in sentences such as this: “‘A Bulgari necklace in the hand is worth two in the bush,’ said Doris.”
• [T]he Campbell Soup Company sent out a free science kit that purported to teach the scientific method. With the use of a slotted spoon (included in the kit), students were shown how to prove that Campbell’s Prego spaghetti sauce was thicker than Ragú, the rival brand. General Mills sent teachers a science curriculum on volcanoes called “Gushers: Wonders of the Earth.” The kit included free samples of its Fruit Gushers candy, with soft centers that “gushed” when bitten. The teacher’s guide suggested that students bite into the Gushers and compare the effect to a geothermal eruption.
• When a bank bought the right to name the Arizona Diamondbacks’ stadium Bank One Ballpark, the deal also required that the team’s broadcasters call each Arizona home run a “Bank One blast.” […] Even sliding into home is now a corporate-sponsored event. [… F]or example, when the umpire calls a runner safe at home plate, a corporate logo appears on the television screen, and the play-by-play announcer must say, “Safe at home. Safe and secure. New York Life.”
• [The] North Carolina-based charity called Project Prevention, has a market-based solution: offer drug-addicted women $300 cash if they will undergo sterilization or long-term birth control. More than three thousand women have taken [up] the offer since […] 1997. • Becker even proposed charging admission to refugees fleeing persecution. The free market, he claimed, would make it easy to decide which refugees to accept—those sufficiently motivated to pay the price: “For obvious reasons, political refugees and those persecuted in their own countries would be willing to pay a sizeable fee to gain admission to a free nation. So a fee system would automatically avoid time-consuming hearings about whether they are really in physical danger if they were forced to return home.” • [There was another] use of life insurance that arose in the 1980s and 1990s, prompted by the AIDS epidemic. It was called the viatical industry. It consisted of a market in the life insurance policies of people with AIDS and others who had been diagnosed with a terminal illness. Here is how it worked: Suppose someone with a$100,000 life insurance policy is told by his doctor that he has only a year to live. And suppose he needs money now for medical care, or perhaps simply to live well in the short time he has remaining. An investor offers to buy the policy from the ailing person at a discount, say, $50,000, and takes over payment of the annual premiums. When the original policyholder dies, the investor collects the$100,000.

• ## Doning with the devil

Donor lotteries are a way for small donors to pool their funds in the hopes that economies of scale will make them more effective. Some people worry about whether others in the lottery are aligned. A parable about a donor lottery with devil illustrates that we should be willing to enter donor lotteries with those opposed to us as long as they have smaller economies of scale.

### Donor lotteries

Effective altruists have proposed and promoted donor lotteries. Briefly, in a donor lottery, donors pool money for charitable contribution. They’re given lottery tickets in proportion to their contributions. The winner of the lottery gets to decide where the pool of charitable funds should be donated. For example, two people each set aside $1,000 for charitable contribution. They then make an agreement and the winner of the coin flip gets to donate the whole$2,000 to the charity of their choosing.

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