Papal Revolutions, Political Habits and Predatory States
Jason Soon talks to Deepak Lal
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Deepak Lal is James S. Coleman Professor of International Development Studies at the University of California, Los Angeles. He is a highly acclaimed economist who, along with Peter Bauer, has long challenged the statist nostrums of development economics and proven to be correct in the long run. His latest book, Unintended Consequences, is a wide ranging examination of the origins of economic and political liberalism and the consequences of this for the differential rates of development between Western and other societies. The main thesis of his book was presented as a speech to the Special Regional Meeting of the Mont P¸lerin Society, held recently in Indonesia, and provoked much debate among delegates.

Jason Soon: You once wrote a book called The Poverty of Development Economics. How would you assess the state of development economics since then?

Deepak Lal: When I first wrote it, development economics was essentially the economics of planning and regulation and it was really written in anger because it had done great damage to many developing economies, particularly India. The most amazing thing which has happened since then, of course, is that in the early 1980s you saw the collapse of the type of dirigiste policies recommended by development economics. My book seems to have done its bit in demolishing the intellectual arguments for dirigisme.

JS: Are there any contemporary writers in the field of development economics whom you admire?

DL: The field is much broader than economics so itÕs hard to say. I think the broadness of the discipline has to be emphasised. In my book with Myint, The Political Economy of Poverty, Equity and Growth, I spent a lot of time on political economy to try and explain why countries did not follow the type of policies which would yield equitable and poverty-reducing growth. And that meant that I had to look at a broader range of issues and then link that with all the cultural issues which my latest book Unintended Consequences addresses.

JS: Would you then attribute the improvements in development economics to developments in other areas of economics which takes us away from the na•ve view of benevolent social planners, such as public choice theory?

DL: Yes. In a sense my political economy book was inspired by public choice but the trouble with public choice theory as it stands is that it was really written with the institutions of the US in mind. For many developing countries, thatÕs not relevant. Part of the exercise is to try and develop the sort of model or sets of models applicable to developing countries. I think the model which best fits most developing countries is what I call the predatory state. I think this has many more insights than public choice theory.

JS: You argued in your speech to this conference, explored at greater length in your book, that of the trinity of liberties ųpolitical, economic and civilųeconomic and civil liberties are essential to a good polity and you are therefore more likely to prescribe them as, in a sense, universal solutions. But you are less convinced of the ŌuniversalityÕ of political liberty.

DL: Yes, I think that without economic and civil liberties you canÕt preserve private property. You need some way of protecting private property and contract for the market to work. But I think those institutions can be readily adopted by adopting the appropriate legal and commercial codes and installing an independent judiciary.

JS: But why isnÕt political liberty part of the prescription?

DL: Both through human history and the history of current developing countries one can see that civil and economic liberty is possible without political liberty. Political liberty is a good in itself but there is no necessary connection between political liberties such as the right to vote and growth and development.

JS: Perhaps the argument which critics of your contention would make is that civil and economic liberties may not be sustainable in the long run without political liberty.

LetÕs put this argument in terms of economic theory. We can conceive of the ruler as revenue maximising. The problem is then to subvert the private interests of the ruler to the public interest.

It is agreed among liberals that policies which are in the public interest are those generally supportive of civil and economic liberties. Such policies are also more likely to maximise the wealth of a society in the long run and thus from the perspective of a ruler with a long run time horizon, are more likely to maximise his revenues in terms of taxes collected.

Thus, as you argued at the conference, it is feasible that a hereditary monarchy might pursue policies in the public interest given that the time horizon of the ruler is lengthened by considerations for his dynastyÕs welfare. He will thus want to maximise the present value of long run tax revenues. But in an authoritarian bureaucracy where there arenÕt any clear and stable succession mechanisms (partly because of the perceived illegitimacy of the process to the general public) the dictator will merely aim at short-run rent extraction. You then have the predatory state.

DL: There are two points to be made. Natural resource endowments determine how predatory the state is. In the political sense, the best thing is not to have any natural resources. Think of Hong Kong or Singapore, theyÕre rocks. The only way their rulers are going to get any revenues is by cultivation of human resources and open market policies whether youÕre a democracy or a dictatorship or a monarchy. It makes no difference when you donÕt have natural resources what form of government there is to ensure development.

Remember that democratic government, after all, serves the interests of the median voter. So all that happens is that any sort of democratic government will extract rents and transfer them to the median voter. In an autocratic system it will go to the cronies. So the form of government if you have natural resource endowments isnÕt going to make a difference to the development path you go down, which will necessarily be less than ideal. I donÕt think that the rent seeking and rent extraction problem can be solved. ThereÕs no unique form of government which will solve the problem in a natural resource rich country like Indonesia and thatÕs why I prefer to go back to some form of government which is in tune with the political habits of the people. That particular form is more likely to be sustainable than some constructed democratic system. Therefore it seems to me that the way forward in Indonesia is to keep to some model of the traditional Javanese king. There are good kings and bad kings and they are ultimately held responsible for their behaviour. Just look at Soeharto.

Of course the Javanese kings will take a certain cut of tax revenues for themselves and their cronies. On the other hand, so long as they provide public goods which are important to development, thatÕs fine and I think Soeharto by and large did this.

The question is what happens when you change leaders? If you have a bad king, the bad king is replaced. ItÕs true, itÕs not a peaceful change. But that doesnÕt mean that the long run stability of the system is destroyed. ItÕs just another form of succession.

JS: So you argue that the stability of succession problem in a dictatorship isnÕt too much of an issue. But nonetheless isnÕt the high magnitude of turmoil during a succession, even if this turmoil only crops up infrequently, going to be a major consideration for, say, the international investment community? Not to mention the danger that during this turmoil civil and economic liberties may slide back as an overreaction to political crises?

DoesnÕt the importance of the succession problem finally lead us back to ChurchillÕs contention that democracy is the worst possible system you can think of except for the alternatives? I suppose one alternative, as you canvassed, is a proper hereditary system but that is hardly feasible in modern times.

DL: Well, there can be all sorts of political forms. You can clothe them with all sorts of labels. The question of political stability is like the problem of changing terms of trade. It just means that the expected income stream is slightly different. Investors with long time horizons will take these things into account. These problems are extremely exaggerated. Finding fixes is dangerous. ThatÕs what all this constitution making is all aboutųitÕs failed. Countries which employ traditional forms of governance have a greater chance of success.

JS: I now want to address your theory that the rise of the West can be attributed to changes in church doctrine. You suggest that changes in church doctrine led to the rise of cultural individualism which in turn led to the rise of the West. From this you also derive the contention that liberty is a Western concept.

DL: Absolutely. If you start asking yourself, 2000 years ago in all the Eurasian civilisationsųRoman, Greek, Hindu, Chinese, Egyptian, etcųeach of them had the preconditions for growth. The Chinese even had all the technological ingredients and Hindu civilisations had algebra. What was different in the West? There was something else. It comes down to their views about how human beings interact with each other. There was a great change in the conception of social relationships. Max Weber came to the same, correct conclusion but he got his dates wrong. He said the great change occurred during the Protestant revolution but we know capitalism started well before this. = The first Papal revolution in the 6th century, promoted the independence of the young. Once that happened, the communal ties of the young to the old were broken. People then essentially had contractual relations with their children. Wills go back to the 9th century in the West.

Then you have the story about the churchÕs greed in trying to get bequests and inheritances. This induced the 11th century Papal revolution which really provided all the legal and commercial instruments needed for capitalism. It created the joint stock companies, the commercial law and accounting systems, all that was essential to a modern economy. This gradually put western Europe on a different trajectory. Add to this the freeing of individuals away from their community and this led to the industrial revolution.

JS: The alternative scenario of how the West grew rich picks up in part on what you said before about the role of the Church in developing the soft infrastructure of the capitalist economy. This interpretation would emphasise the fact that in western Europe, partly for reasons of geography and partly from contingent historical factors, societies were splintered into competing nation-states. The real source of the superiority of the soft infrastructure of the West thus lay in its evolution through jurisdictional competition facilitated by the freedom of entry and exit enjoyed by merchants. One notable example of this is the development of the law merchant.

DL: IÕll tell you what the difficulty is with this argumentųIndia. India had warring states, free entry and exit between them, a common culture. You had exactly similar conditions yet the Industrial Revolution took place in Europe. It canÕt be just jurisdictional competition.

JS: What exactly is the role of cultural individualism in differentiating the trajectory taken by the West? Because obviously the nub of your argument isnÕt that cultural individualism is important in sustaining development, otherwise that would imply a superiority to Western values in sustaining economic development and growth, and that would take us back to the issue about the trinity of liberties.

DL: Well the individualism comes in in two ways. The cultural individualism promoted by the first Papal revolution then led to a sequence of events leading to GregoryÕs 7th Papal revolution. That only occurred because the Church wanted to preserve its property and that property existed because the first Papal revolution, by dissolving communal family ties, promoted individualism. So my thesis is really that given this sequence of events the rise of individualism was essential to get the legal and commercial instruments constructed by the Church to cash in on bequests and inheritances. But once you have this infrastructure the rest of the world can adopt it without giving up their own value systems.

JS: So your theory really hinges on the standardisation of the common law and other commercial instruments by the church.

DL: This created the framework for civil and economic liberties. It arose on a purely contingent basis. ThereÕs no theory of history involved here.

Hayek emphasises spontaneous order. But all the common law that came after the Papal revolution has in a sense been constructed. It was a contructivist exercise.

JS: But the jurisdictional competition É

DL: That still holds. You need all these things together.

JS: Arguably what set the stage for the jurisidictional competition is political fragmentation and that came with feudalism. DL: But the political fragmentation starts at the end of the Roman empire. The real issue is the tying down of labour to the landųthis is a common problem faced by agrarian civilisations. Feudalism in the West gave rise to property rights in land for people outside the royal family and courtiers. That arose because of the ability to raise revenue directly. In India by contrast you had a very decentralised system which was based on caste. But there wasnÕt the same capacity to free people from their ties to the land because the caste system localised people more and India didnÕt have the legal and commercial framework for a more direct and flexible form of revenue collection. Thus in India traders were constantly subject to expropriation. You had predatory behaviour even though there was jurisidictional competition.

JS: So in fact the jurisidictional competition that prevailed in the West was qualitatively different.

DL: The predatoriness of the state came in a different form. The tax take on the Indian subcontinent was less than in Elizabethan England. Whoever was the overlord in India was accepted automatically because of the caste system. And then he had a right to a certain share of the village revenue automatically. That meant that the ruler had no incentive to disturb relationships. As a result you had something resembling the contractual relations between the barons and serfs in Europe. Feudalism was thus not an important differentiating factor in the West. What was important was the constructed legal framework without which none of the other things which made the West successful would have fit together.

JS: But in China there was sufficient centralisation to impose a constructivist framework É

DL: It could have but it wasnÕt invented É

JS: And what stopped it from being invented was precisely the centralisation of power which instead allowed the State to be predatory without losing rents É

DL: And also because there was no distinction between state and society or state and religion. But in both Hindu and Western civilisations the state was placed below society. The brahmin in Hindu civilisation stands above the prince and in Christianity there is AugustineÕs primacy of the city of God.

JS: Arguably the sustainability of the soft infrastructure for capitalist innovation developed by the West lies in continued contestability.

DL: IÕm not sure about that. Once youÕve got it, it can go with all sorts of political forms.

JS: The other part of your paper which interested me was your take on the Chinese family firm and the increased relevance of the putting out system in the post-Fordist era. I suppose that could be framed as a response to FukuyamaÕs contention that many East Asian countries, being low-trust societies due to factors such as political instability or State repression in the past, were in danger of hindering their development. This was because by restricting the potential management pool to members of the family rather than including non-kin relations, they had much less chance of choosing the best talent and therefore of diversifying and expanding their firms.

DL: I donÕt agree with Fukuyama at all. Firstly no mode of production is ideal for all circumstances. Today, the family firms have found a niche. The second reason that Fukuyama is wrong is that trust is also a family value. What the Papal revolution did was create a system in which people didnÕt need to trust each other to get things done. I donÕt have to trust you but I sign a contract with you and have it enforced by someone else. The market extends the exchange between us. ThereÕs no reason why once China accepts the legal and commercial framework of the West the family businesses there wonÕt expand as has happened in the West.

I suppose you can put a cultural spin on it. Because Asian families are still intact itÕs much easier to have these large family enterprises than if they were just nuclear families.

JS: Now on to a few shorter questions. You once wrote an essay called ŌMarkets and MandarinsÕ in which you were critical of neoclassical welfare economics and you expressed some interest in Austrian economics.

DL: The problem is that neither of these schools are quite satisfactory. Neoclassical economics has this utopian vision of perfect competition from which you measure deviations in an actual economy. ItÕs a nice way of thinking about things but the reason it has gone wrong is that itÕs started drawing policy conclusions in terms of desirable interventions. ThatÕs where Austrian economics is much more sensibleųit shows you why neoclassical economicsÕ derived intervention is utopian. No real economy can ever be in a state of perfectly competitive equilibrium. Hence HayekÕs insight about the division of knowledge being absolutely essential to a market economy, and the importance of the Austrian insights about the role of the entrepreneur and disequilibrium.

On the other hand it seems to me that Austrian economics, the radical subjectivist versionųnot Hayek but Misesųwhich wants essentially to remove objective reasoning away from economics, becomes like a religion. I donÕt like that at all. If IÕm trying to look at a particular market and how some prices are moving, neoclassical economics provides a way of thinking which is rigorous and can be tested. So IÕm not at all one of those people who want to throw out neoclassical economics. I look at myself as a neoclassical economist with an Austrian spin.

JS: Some participants at this conference have raised the issue of whether the Asian crisis was really a refutation of economic liberalism.

DL: I donÕt buy that at all. Looking at the Asian crisis, there were two sorts of people. My side said that there was never free trade in the Asian miracle countries, but high outward orientation, a glass half full or half empty. People on my side said the Asian miracle economies hadnÕt gone down the full path to liberalism but they had gone further down than India or parts of Latin America. What we were then saying during the miracle growth period was that even a partial move towards a liberal economy could yield all these benefits. But the other side was saying that these countries had grown because of smart interventions like industry policy. But what the crisis then showed was the debauching of the financial sector entailed by this ŌAsian modelÕ is always a time bomb waiting to go off.

JS: So it was the consequence of those interventions in the financial sector which built up and debauched the whole system. DL: Yes, for instance in Japan and Korea. It didnÕt happen in Taiwan. All those countries which were soft versions of Japan and Korea suffered.

JS: You have expressed the view that the moral hazards created by the International Monetary Fund (IMF) had a hand in the crisis. You have also argued that the World Bank and IMF are past their used-by dates. But if thereÕs a need to transplant the soft infrastructure of Western capitalism into the East Asian countries and to ensure transparency perhaps this could be an alternative role for one of these organisations.

DL: It could be. On the other hand, these skills can come from accounting firms and so on. The countries can pay for these services. There are no special skills in the IMF or World Bank in giving this advice.

JS: IÕve met a lot of Indian libertarians at this conference.

DL: YouÕve met all of them. YouÕve probably met every single Indian libertarian at this conference, there arenÕt anymore.

JS: Do you think that the prospects for liberalism are better in India than in other Asian countries?

DL: In the long run I think so. This goes back to the question weÕve been groping around on political freedom. India has done a lot less than other countries in economic reform because of its democratic system. But once the reforms take place and once people see the benefits from the full liberal democratic system in India there will be a lot more people there who will recognise the desirability of such a system.

JS: LetÕs go back to this political freedom issue. YouÕve expressed the view that what Oakeshott calls the no enterprise state is the best form of governance.

DL: Yes, but thatÕs a characterisation of the content, not a form of government.

JS: But perhaps in the long run a liberal democracy constrained by a constitution might be the best means of preserving a no enterprise state compared to other forms of governance.

DL: No, because just look at experience. The US is theoretically a constitutional democracy but this hasnÕt stopped predatory behaviour by the State. The predator there is differentųitÕs the median voter. I think itÕs an insoluble problem in principle.

JS: So how much ground would you give to the particularities of a culture and the political habits of its people, in deciding the extent of its governance? More importantly, how would you decide whether this is genuinely culturally based or a creation of an authoritarian elite, as some have alleged in the case of Singapore?

DL: I donÕt like Singapore but thereÕs not a great deal of tyranny there. The fact that in the last 30 to 40 years itÕs been a stable system suggests to me that there has been some legitimacy in the system. So who am I to judge? You should look at this with the eyes of an anthropologist. Try and explain what is it about the system which fits in with the political habits of the people and if thatÕs so, thatÕs so.

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