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Review by Wolfgang Kasper

Political Competition, Innovation and Growth ø A Historical Analysis
by P. Bernholz, M.E. Streit, and R. Vaubel (eds.)
Springer, Berlin-New York, 1998, viii+308 pp,Ê DM 149.00,Ê ISBN 3-540-64680-9

found this collection of essays thrilling and hard to put down. ProminentÊ economists, historians and jurists explore the historic hypothesis that jurisdictions frequently compete among themselves by creating institutions (rules) to retain or attract mobile capital and enterprises and that, as an unintended by-product of their rivalry, they secure the fundamental liberties on which innovative enterprise and economic growth are invariably founded. This topic plays once again an important role in the policy debate. And it is central to the paradigm of Austrian, institutional or evolutionary economics which is now rapidly gaining acceptance. This approach to economics asks how the knowledge essential to rising living standards is found and exploited ø instead of beginning with the assumption of Ôperfect knowledge,Õ as neoclassical economic rationalism does.

Institutional economics and the new economic history maintain that expedient, non-discriminatory rules matter to prosperity, peace and freedom, that the rules can be shaped to facilitate attainment of these fundamental values, and that communities are ultimately responsible for the rules they create as well as the consequences of persisting with poor rules. In open economies, which allow owners of certain production factors to vote with their feet, there is a likelihood that the institutional system will be enhanced. We see this in present-day Australia where the liberalisation of international capital flows and trade has exerted pressures to get on with partial domestic reforms, for example of labour markets, the professions and infrastructures, as well as to change attitudes to work, service and cooperation.

No one has done more to revive these basic insights of institutional economics than the winner of the 1994 Economics Nobel Prize, Douglass C. North. In the opening essay of the book, he summarises the results of a lifetime of research. The rise to world dominance of the Far West of the Eurasian continent had as its ultimate cause the rivalry among the small, open states ofÊ Europe. They experimented with new institutions to attract merchants, knowledgeable people and capital to enhance their tax base. Their rulers subjected themselves to rules which prevented arbitrary, discriminatory government. Douglass North shows that private property rights and the freedom of contract were normally only safeguarded when the rulers were under extreme fiscalÊ stress. Then, they were not able to Ôput sand in the mechanismsÕ of international mobility to gain more control, along the lines suggested recently by the Governor of the Reserve Bank of Australia as an appropriate response to the Asian crisis. Where theÊ rulers of earlier ages were successful in maintaining control by such market-impeding devices, they tended to fall prey to political opportunism, failed to supply good rules, and ultimately reaped stagnation instead of stability.

Manfred Streit adds to NorthÕs pathbreaking analysis by showing how the interplay between economic and political competition drives a process of institutional innovation which has reduced the transaction costs of enterprise, and in particular of technical, organisational and commercial innovation. He also points out that growth is not only a matter of better government-made rules, but importantly also of better ethical norms, trading customs and other internal rules that evolve within communities. American jurist Harold J. Berman demonstrates how the cultivation of the Western legal tradition has promoted economic growth and innovation, offering much novel and telling detail. Others show how closed societies, such as the Roman Empire and Spain after the sixteenth century, have fallen prey to political power games and dysfunctional markets, only reaping stagnation and decline. The essays are valuable for the expert detail and for showing us that history is often more complicated than the simple underlying model implied in this brief book review.

As this volume makes abundantly clear, the institutional hypothesis of economic growth and decline is far from new: German philosopher Immanuel Kant expressed the view in 1784 that what we now call ÔglobalisationÕ was by then so advanced that it was inevitable that the rulers would have to self-constrain their opportunism and civil liberties could no longer be assailed. Likewise, English historian Edward Gibbon wrote in 1787 that Ô[t]he abuses of tyranny are restrained by the mutual influence of fear and shame É monarchies have imbibed the principles of freedom, or at least of moderation.Õ History has shown subsequently that there was nothing inevitable ø and we should draw the lesson that the globalisation wave of the presentÊ age, despite all its potential for constraining rent-seeking and arbitrary rule, does not necessarily ensure that the potential is realised. The rulers and rent-seekers are already out there, arguing for re-regulation and limitations on the capital flows that threaten their power and that mightÊ empower the citizens.

Several fascinating essays in this highly readable book show that the rapid rise of several civilisations of Antiquity, the Sumerians, the Phoenicians and, above all, the Greeks, owed much to the rivalry among small, open city states which experimented with alternative institutional and constitutional devices. TheÊ small Greek trading cities of the pre-Classical era were laboratories in which new institutional devices were invented and tested, a process by which classical freedoms were created (for propertied males) and the basis for the amazing creativity of the Greek Classical era was laid.

Other case studies provide much fascinating detail of the battle for economic and political liberties, for example in the Netherlands (by Peter Stable and Jan de Vries) and Britain (by Sidney Pollard and Max Hartwell). Once one goes through the historic detail, one sees the striking similarities between the obstacles that lay before the start of modern economic growth and the present-day objections by political agents and interest groups to openness, globalisation, OECDÕs Multilateral Agreement on Investment, and the free flows of international finance. Whenever self-seeking politicians were able to seek shelter from the discipline of openness, they lost the capacity of discovering what served the real economic and civic well-being of ordinary citizens!

If we fail to learn the lessons of history, we will be forced to learn from the traumatic outcomes of new attempts to impose economically irrational, though politically entirely rational controls of individual liberties.

Reviewed by Jason Soon

Merits and Limits of Markets
edited by Herbert Giersch,
Springer-Verlag, Berlin, 1998, 279pp, DM139, ISBN 3-540-64446-6

This anthology is based on the proceedings of the 1997 Symposium of the Egon-Sohmen Foundation and comprises 11 papers. All are well written and thought provoking, though arguably some were misconceived from the beginning.

As is the case with most anthologies ø but especially with this one, which comprises contributions from differing perspectives ø it is difficult to evaluate the collection separately from the individual essays. Nonetheless it can be said that Herbert Giersch has made a very apt selection and division of topics. Most of these essays indicate GierschÕs Ordo-liberal influences, evident in his own fascinating work on economic morality and intergovernmental competition, and reflecting a conception of economics as being set within a rich institutional and philosophical framework.

The anthology is divided into three sections focusing on different aspects of markets and market institutions.

The first section, ÔIndividualism in a Social ContextÕ, deals with the fundamental political economy of a free society and debates revolving around individualism versus communitarianism. Tellingly, the editor writes, ÔCommunitarianism was included in the hope that their leading proponents would find timeÊ É to forcefully argue with us about the movementÕs views on fundamental issues É Our hopes turned out to be too optimistic.Õ

Nonetheless the contribution by the communitarian thinker, David Anderson, provides a lucid and useful summary of the currents of communitarian thought. Readers can judge for themselves the veracity of the claim by the well-known proponent of communitarianism, Amitai Etzioni, that communitarianism has provided a serious challenge to liberalism. The problem with EtzioniÕs philosophy, as AndersonÕs essayÊ inadvertently reveals, is that it is neither here nor there, and is marked by platitudes and non-testable propositions.Ê

The essay by Gary Madison on ÔSelf-interest, commun-alism, WelfarismÕ, though written from a classical liberal perspective, is characterised by the same sort of ill-informed attacks on mainstream economics and rights-based libertarianism which has become the modus operandi of Etzioni. Like Etzioni and some proponents of economic irrationalism, he confuses the methodology of modelling economic behaviour, which is simply a straightforward application of OccamÕs Razor, with economistsÕ description of actual human behaviour. However, his essay is useful in its attempts to address communitarian concerns within the framework of his particular interpretation of classical liberalism.

The other two essays from the first section are, by contrast, written from a more solid grounding in the philosophical perspectives which they comment upon. Peter BoettkeÕs essay illustrates the forgotten link between the work of Max Weber and Austrian economics while the essay by Voigt and Kiwit on beliefs, habits, norms and institutions is an exemplar of the standard of work which EtzioniÕs ÔSocioeconomicsÕ aspires to but does not attain.Ê

The second section of the anthology looks at ÔThe Frontiers of MarketsÕ and comprises economic treatments of some of the more difficult markets to analyse, namely legal and administrative services, health services and insurance, education and the arts. They combine theo-retical erudition with a careful study of the characteristics of these markets. As the editor points out, the common theme of the essays in this section is the blurring of the frontier between private and public supply.

Bruce BensonÕs careful survey of developments in private policing and security, alternative dispute resolution and government contracting out of legal functions is particularly noteworthy given the serious revival of ideas about polycentric legal orders lately.

The last section, dealing with ÔNormative Issues of Global TradeÕ once again comprises very novel treatments of an extensively studied area of economic behaviour. There are two essays which are primarily concerned with economic analysis, one on the need for an international competition policy by Dennis Mueller and one on international trade in ÔbadsÕ (e.g. weapons and drugs) by Krueger and Aturupane.

The final essay in this collection, on ÔSocial Standards and Social DumpingÕ by Deepak Lal ranges a bit further into the hinterlands of rights theory and intellectual history. Unfortunately, unlike the typical Lal essay which is clearheaded and precise, his discussion here verges on the eccentric and idiosyncratic.

It seems as if, in an attempt to refute the new protectionists who are attempting to smuggle in trade restrictions under the guise of concern for human rights, he has thrown the baby out with the bath water. Thus he seems to dismiss all evaluation of social practices in terms of rights theory as Western cultural imperialism. He also makes questionable assertions such as the following ø ÔA prohibition of discrimination on grounds of race or creed can more readily be derived from notions of general rights to libertyÕ (263). While this may be true of discriminatory government policies, it is difficult to see how a prohibition on discriminatory behaviour by private citizens could be justified by a sound application of liberal rights theory, as it would conflict with an individualÕs freedom of association.

While it cannot be denied that promiscuous makers of ÔrightsÕ ø such as may be found in the United Nations ø have taken this concept to the limits of absurdity, this in no way justifies the cultural relativism which Lal attempts to deploy against such follies.

Reviewed by Robert Clark, Parliamentary Secretary, Treasury and Multimedia, in the Victorian Parliament.

The Crisis of Global Capitalism: Open Society Endangered
by George Soros
Little Brown, London, 1998, 245pp,$39.95, ISBN 0 316 84916 2

When someone consistently makes money trading in financial markets, it is due either to exceptionally good luck or to some superior insight or skill.

Unless one is confident of the former explanation, when such a person commits their thoughts to writing they are thus entitled to receive some attention.

Such is the case with George SorosÕ latest book, The Crisis of Global Capitalism: Open Society Endangered .

SorosÕ book is not only about his conclusion that, without intervention, the global capitalist system is on the verge of collapse.Ê

It is also about his broader economic, political and social methodology and philosophy, including his commitment to an Ôopen societyÕ ø a commitment he has been prepared to back with large amounts of his own money through a foundation he established: the Open Society Fund.

SorosÕ book falls into two main parts. The first lays out his methodology and his philosophy, and the second applies these to the current international financial and political situation.

The key elements of SorosÕ methodology are his principles of ÔreflexivityÕ and ÔfallibilityÕ.Ê By ÔfallibilityÕ Soros means that, while an objective reality exists, all theories about that reality, and all other constructs of the human mind, are inherently imperfect.Ê However theories are capable ofÊ being improved and thus can approach closer to (while never reaching) perfection.Ê

By ÔreflexivityÕ Soros means that in markets and in the social sciences, theories and expectations of the future can themselves affect what the future will be. This can occur when the person formulating the theories and expectations is also a participantÊ in the events about which theories and expectations are formulated. By contrast, in the natural sciences what will happen will happen, regardless of the expectations of the scientist.

Soros argues that faith in the free operation of markets ø which he calls Ômarket fundamentalismÕ ø is misplaced, because traditional economics overlooks the existence of these factors of fallibility and reflexivity.Ê

In particular, these factors mean that markets do not inevitably tend to equilibrium as traditional economics assumes. While in ÔhumdrumÕ cases they often do so, in other cases a combination of a prevailing trend and a prevailing bias of thinking amongst the participants can drive the market far from equilibrium and keep it there for some considerable time, until ultimately reality forces a dramatic reversal. This is the cause of the Ôboom-bustÕ cycle in financial markets, and this cycle is not self-correcting without regulatory intervention.

Soros is also concerned that excessive commitment to market values, coupled with a decline in social values, is causing market behaviour to be extended to inappropriate areas, such as culture, the professions and government. People, he says, oughtÊ to distinguish between playing by the rules and setting the rules, and in addressing the latter, people should be considering the common good, not their individual self-interest. The intrusion of market behaviour is corrupting the political process and thus in a ÔreflexiveÕ manner reinforcing the trend to extending even further the areas in which market behaviour occurs.

Soros is a supporter of an Ôopen societyÕ ø a society which can freely debate and modify its theories of reality ø which Soros contrasts with a closed or totalitarian society. One of the main characteristics of such a society is that a rigid dogma is imposed and no-one is permitted to draw attention to disparities between reality and the official ÔfactsÕ of the dogma. In light of the Russian experience Soros considers that Ôopen societyÕÊ balances precariously between Ôclosed societyÕ on the one hand and a lawless society on the other.

In the second part of his book, Soros argues that there is currently a crisis in global capitalism due to the Ôwrecking ballÕ effect of swings in international capital flows. From the 1980Õs, capital flowed into countries at the financial periphery. Continuing capital inflow boosted the value of investments in those countries, thus reinforcing the initial decision to invest there (the principle of ÔreflexivityÕ at work). For a long time this sustained a gap between the apparent and true profitability of investments in those countries. However, once doubt set in, there was a sudden loss of liquidity and capital flowed out, and this swung the process into reverse, causing collateral to lose its value and defaults to flow through the system.

Soros illustrates and supports his arguments with detailed description of and commentary on international financial events from the Thai difficulties of July 1997 through to October 1998, concentrating particularly on Asia and Russia.

Soros (writing up to November 1998) considers the most likely outcome is that, without regulatory intervention, the current financial flows out of countries at the periphery will become so extreme that many countries will opt out of the international financial system, as Malaysia has done. These will obtain short-term benefit at long-term cost, and put even greater pressure on their neighbours. Furthermore, intense poverty will cause social unrest and the overthrow of governments, which will be replaced by regimes that will notÊ only prevent free capital flows, but are also likely to reject free trade and nationalise existing foreign investments in their countries.

Soros further predicts that if this outcome does not occur as a result of the current financial situation, the markets will be tested even more severely later on, and the results he predicts will follow then.

His remedies are basically threefold:

¥Ê a greater willingness by governments to provide liquidity to the system in appropriate circumstances while also imposing greater financial pain on lenders;

¥ regulation of the international financial system to an extent similar to western countriesÕ regulation of their domestic financial systems (which requires the establishment of new international financial institutions), and

¥ greater commitment to the principles of an open society and a restoration of non-marketÊ values such as civic virtue.

While SorosÕ book is written in a direct and unaffected way, and contains some acute observations on markets and human psychology, it suffers from two fundamental and grating flaws.

The first is SorosÕ use of his principle of ÔreflexivityÕ as a new and radical insight capable of explaining almost every current economic and financial problem. While SorosÕ analysis of the practical interplay of bias and trends in financial markets may be original and valuable (others can judge this better), the general proposition that participantsÕ expectations can affect outcomes is neither new nor radical.

The second flaw is SorosÕ frequent misstatement of alternative views in the form of straw men, which he then proceeds to knock down. One obvious example is his claim that traditional economics has failed to recognise that market forces can push the market away from, rather than towards, equilibrium. This claim is readily refuted by the fact that almost every basic undergraduate economics textbook sets out the ÔCobweb TheoremÕ which shows that if producers base next yearÕs production decisions on this yearÕs prices, prices and market volumes can oscillate wildly.Ê

The frequent appearance of these readily dispensable Ôstraw menÕ results in Soros not tackling many of the deeper questions which his lines of argument trigger. For example, he does notÊ even address ø let alone refute ø theÊ proposition that many free market supporters would advance: that the financial difficulties many countries have experienced are mainly attributable to the lack of adequate domestic financial regulation and economic reform, which could have prevented their problems arising or greatly reduced the effects.

Neither does Soros address the argument that the greater openness and liquidity of modern markets, and the speed of adjustment which new technology permits, in fact reduces, rather than increases, the effects of financial market fluctuations on underlying real economic activity, provided there is a sound domestic regulatory regime. If you wake up in the morning and find half your paper wealth wiped out but expect that the market has probably bottomed, you (and others) get on with addressing that reality, rather than struggling on for weeks hoping for a market rebound and clinging to increasingly implausible asset values.

I suspect that SorosÕ straw men are not the result of deliberate artifice on his part. Rather they reflect the fact that on the sound foundation of his strong practical understanding of markets and human thinking, Soros has cobbled together a ramshackle philosophical superstructure based on his own theorising and bits and pieces he has accumulated over time from various disciplines with which he has had some superficial contact.Ê

This superstructure appears to have suffered badly from a lack of exposure to and testing by those familiar with particular disciplines such as economics, politics and moral philosophy.

Further, and even more tellingly, on the evidence of this book SorosÕ intellectual strength to date does not lie in economic, political or moral theory. Some of his analysis and factual observations pose serious questions that need to be answered about how the regime under which the international financial system operates should best be constituted. While others may feel the same unease as the author about contemporary political and moral values, this book does not persuade the reader that Soros has the answers.

On the other hand, the bookÕs narrative description of the unfolding financial market drama is informative. The book also has some astute observations such as the following, to which Soros attributes the foundation of his business success:

Éa financial hypothesis does not have to be true to be profitable; it is enough that it should become generally accepted.Ê But a false hypothesis cannot prevail forever.Ê That is why I liked to invest in flawed hypotheses that had a chance of becoming generally accepted, provided I knew what the flaw was: It allowed me to sell in time.(p.22)

Despite its serious flaws, the book is a worthwhile read. To parallel SorosÕ own language ofÊ ÔreflexivityÕ, the fact that it is out in the public arena influencing perceptions, and perhaps even reinforcing trends, makes it desirable for those interested in these issues to be aware of what the book is saying.

Reviewed by Charles Richardson

Justice for Here and Now
by James P. Sterba
Cambridge University Press, 1998, 246pp, $34.95,ISBN 0-521-62739-7

James SterbaÕs project is an exciting one. He proposes what he calls a ÔpeacemakingÕ way of doing philosophy, and by this method he undertakes first to demonstrate that morality is a requirement of rationality, and then to reconcile the different moral perspectives of libertarians, welfare liberals, socialists, feminists, pacifists and deep ecologists. It is hardly surprising that these ambitions are not fully realised, but SterbaÕs failure, I think, is an instructive one.

The most interesting part of the book, at least for readers of this journal, is chapter three, in which Sterba tries to show that libertarian principles, if consistently applied, actually justify an extensive system of social welfare and redistribution. SterbaÕs argument proceeds directly from the idea of liberty, which is so precious to libertarians. He argues that defence of property rights against the poor is a restriction of their liberty:

What is at stake is the liberty of the poor not to be interfered with in taking from the surplus possessions of the rich what is necessary to satisfy their basic needs. ... When the conflict between the rich and the poor is viewed as a conflict of liberties, either we can say that the rich should have the liberty not to be interfered with in using their surplus goods and resources for luxury purposes or we can say that the poor should have the liberty not to be interfered with in taking from the rich (p. 45).

If allÊ that is atÊ stakeÊ is aÊÊ bare conflict of liberties, it is not hardÊ toÊ see why the liberty of the poor shouldÊ be preferred, on the basis ofÊ their greater need. (AÊ slightly more involved version of the same argument is used against ÔLockeanÕ libertarians,ÊÊÊ who take property rights rather than liberty as primary.) I haveÊ no problemÊ withÊ the conclusion that the wealthy are morally obliged to spend their resources on meeting the basic needs of the poor, if those needs cannot be met in any other way (e.g. by the poor using their initiative). There is a big gap, however, between that conclusion and the welfare state.

Sterba tries to bridge that gap by way of what he calls the ÔConflict Resolution Principle,Õ which says that Ôif any action is morally required for a person to do, all things considered, that action is reasonable to ask or require that person to doÕ (48; original emphasis). But this principle trades on an ambiguity in the term ÔrequireÕ; on one reading it clearly suggests that there is someone there to do the requiring (not just the moral principle itself). In other words, coercion of the immoral is on the agenda.

But on this reading, the Conflict Resolution Principle is clearly unacceptable: in fact, its denialÊ is absolutely fundamental to liberalism, which must recognise that people can do morally objectionable things without anyone thereby acquiring aÊ right toÊ interfere with them. And indeed Sterba does not go that far, butÊ he goes far enough toÊ be worrying, saying that although Ônot all moral resolutions can be justifiably enforced,Õ those relating to Ôsevere interpersonal conflicts of interest can and should be enforcedÕ (48; original emphasis). He therefore rejects the suggestion of a Ôpower struggleÕ between the liberties of rich and poor (although I am not sure the poor would come off as badly in this as he thinks ø after all, there are a lot more of them).

If it is accepted that the poor have more right to the surplus possessions of the rich than the rich do, then, even though this is still only a ÔnegativeÕ right of non-interference, Sterba thinks he can reach the whole apparatus of ÔpositiveÕ welfare rights. Without positive rights, the poor would be at liberty to take what they need at their discretion, and to avoid this chaos, Sterba argues, the rich would take the initiative and Ôset up institutions guaranteeing adequate positive welfare rightsÕ (56). He goes on to argue that when the interests of those in poorer countries and future generations are taken into account, nearly all of the surplus would be consumed by redistribution.

But now empirical considerations are to the fore, and this is where SterbaÕs weakness shows most clearly ø and why this is ultimately a disappointing book. He has simply taken on wholesale the tired left-wing position on the causes of world poverty, together with the strange idea that problems can be solved by straight transfer of resources. I think Sterba would deny this; he claims that it is the theoretical conclusion that interests him, let the chips of implementation fall where they may, but the selective nature of his presentation belies any such claim.

The moral for libertarians here is that the practical argument should not be neglected. Even if coercion of the rich by the poor was morally justified ø and although SterbaÕs arguments are unconvincing, I am quite prepared to believe that in extreme cases it might be ø it might still be a bad idea in practice. Certainly there are good reasons to believe that to systematise coercion by setting up a welfare state is a very bad idea, for the poor at least as much as anyone else.

The remainder of the book can be summarised more quickly. SterbaÕs attempt in chapter 2 to reconcile morality and rationality seems to me to come to founder on his claim that there is no non-question-begging justification for egoism. Surely the egoist can respond that morality exists to guide actions, actions of particular agents, and therefore the agentÕs well-being is a more valid goal than the well-being of others. In any case, I think the desirability of equating the moral with the rational is far from obvious. There are enough unpleasant activities with a claim to rationality (e.g. racial discrimination) to suggest that such an equation may end up weakening moral feeling rather than strengthening it.

SterbaÕs extension of his discussion into areas such as feminism and anthropocentrism (chapters 3-7) should be less controversial for liberals. These are important topics, and Sterba has many good ideas about them, particularly in refining the ideal of ÔandrogynyÕ and defending it against both male and female supremacists. His reconciliation of animal rights and Ôdeep ecologyÕ perspectives is about the most persuasive that I have seen, and he also has interesting things to say about pacifism and Ôjust warÕ theory.

Even here, however, Sterba has serious blind spots, and he often assumes without discussion that the state is the proper agency to correct any injustice. The idea of Ôgovernment failureÕ does not seem to have entered his head. This left-wing bias is reflected in his sources, and his discussion of topics like racism, equal pay and domestic violence is so unremittingly one-sided that it grates even on the sympathetic reader. It also leads him into strange statements like the comment that ÔOther countries have made even greater strides through comparable worth programs. For example, in Australia women now earn more than eighty cents for every dollar men earnÕ (111).

On the whole, SterbaÕs aim is to be admired. No one familiar with professional philosophers will fail to recognise the institutionalised backbiting and one-upmanship that he describes at the start of the book. Peacemaking may not be the holy grail that Sterba presents it as, but reconciliation of differing viewpoints is nonetheless a worthwhile goal. One can only wish that, in pursuing it, Sterba had checkedÊ some of his own presumptions a bit more carefully.

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