Wednesday, August 22, 2012

The Monotonicity of Directional Euvoluntarism

Foreword: this post is a little flightier than much of the other content here. It's also better suited to those who have formally studied poli sci or public choice. If you prefer to keep your euvoluntary exchange content deliciously free of abstraction and down to earth, you might want to give this one a pass. More below the fold...

In math, a monotone function weakly preserves the rank order of the relationship across the domain. In economics, we occasionally use this idea to discuss preferences. For example, if I prefer two apples to one banana, I have monotonically increasing preferences if I prefer four apples to two bananas. Contrariwise, if I prefer two bananas to four apples, I have preference reversal. Neoclassical theoretical economics assumes monotonicity of preferences and at least some of the empirical literature is devoted to finding evidence to disprove the theory.

If we expand this idea of a monotone function to institutional forms or to regime characteristics, we see with alarming regularity that not only can aggregate preferences be incoherent*, but there's seldom any reason to suspect that public provision of services provides monotonically increasing benefits over even +/- 1 sigma ranges. Consider imprisonment: some level of incarceration is optimal. Prison provides (maybe) a little deterrence (I'd normally link to A-Tab's paper on Three Strikes here, but my browser is acting up right now) but mostly, keeping criminals off the streets means that they're behind bars rather than plying their trade on the streets (ibid.). However, it's not at all clear that there's much in the way of either deterrence or sequesteration is gained by throwing otherwise peaceful drug users in the slammer, yet the US criminal justice system does this quite a bit. To the extent that crime reduction is a function of the quantity of prisoners, this relationship is not monotonic.

How about freedom in trade? I've been pounding the pulpit here about a spectrum of trade that runs from extractive coercion to benign euvoluntarism. Should we expect that moving up this spectrum will necessarily generate greater social welfare?  At the endpoints, I think it's pretty obvious that command-and-control economies fare poorly against their more liberal counterparts. The middle bits are a bit less clear. A strong central monarchy might plausibly keep wayward nobles in check (and if you ask Douglass North and his colleagues, this describes the institutional gulf between pre-Glorious Revolution England and contemporary France), ironically creating economic freedom by centralizing and consolidating political authority. Similarly, when the purse strings moved into the hands of Parliament, effective marginal tax rates went up in England, but so did prosperity. For the median Englishman, life became less euvoluntary in 1688, but it's entirely plausible that the Scottish Enlightenment and the Industrial Revolution that attended it owed more than just a tip of the hat to William and Mary.

Lest I fail to hold ceteris parebus, let me disclaim that a just-so story over a turmoil-ridden period of history cannot be adequately developed in an off-the-cuff blog post. There's a lot of good proper scholarship done on the Glorious Revolution. I point you to North, Wallis and Weingast (Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England), Wells and Wills [my favorite Canadian economist and my undergraduate professor] (Revolution, Restoration, and Debt Repudiation: The Jacobite Threat to England's Institutions and Economic Growth) and the definitive Greg Clark (The Political Foundations of Modern Economic Growth: England, 1540-1800). I don't know for sure if I can even slake my curiosity here. It seems convincing that a strong, coercive central ruler acting as an Olsonian stationary bandit, holding over-dissipating local elites in check could be both less euvoluntary than the alternative and still better for the public good.

The problem with this thinking is that it pits two euvoluntary conditions against each other. Is it legitimate to claim that we move strictly in a non-euvoluntary direction when a central authority muzzles obstreperous nobles? Can I force a trade-off between coercion by human authority and a drop in BATNA disparity brought on by better economic conditions? It might not be fair of me to claim that over a reasonable time horizon that hoisting leviathan is necessarily a move down the euvoluntary spectrum. Indeed, I'm not even sure it's appropriate to think of decisions over political institutions in terms of euvoluntary trade, especially since the conventions of ownership are endogenous to those very institutions.

For the time being, I think I'll call this question unresolved. If this were Mythbusters, I'd go with "plausible". I think I'll reserve a future post to revisit this. A better approach to this question might be to model a merchant's relationship with the Mafia then see what happens when we introduce law enforcement, complete with taxation. There are probably some interesting comparative statics in there. At the point of indifference, which relationship is more euvoluntary? Which is better for welfare?

Stay tuned.

* For the best introduction to these sorts of dilemmas in political science, please pick up a copy of Hinich and Munger's Analytical Politics. It's thorough, clear, easy to read, and blissfully free of pretense. I use it to teach undergrad Public Choice, but it's comprehensive enough to include in a graduate course.

Afterword: I originally posted this before I wrote up my thoughts on euvoluntary institutions. If I'm lucky, it won't show up out of order, but in case it does, perhaps the other post will provide sufficient support for some of the claims I make here. Also, I think this remained visible in Google Reader after I had reverted it to draft. I apologize for any inconvenience.

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Do you have suggestions on where we could find more examples of this phenomenon?