When I first encountered the ideas central to the winners of this year’s three Nobel Prize in Economics around two and a half decades ago I was startled. The excessive economy of their framework for understanding a complex global reality combined with a set of premises that looked starkly ideological. Despite the time that has passed, the reams that have been written, and the imprimatur these ideas have now received, these charges remain pertinent.
The point of view of the authors remains narrowly focused – even fixated – on property rights, seeing them as defining inclusive economic institutions and as underpinning inclusive political institutions, the coupled concepts at the center of their understanding of Why Nations Fail, the sizable volume in which two of the authors elaborated and extended their view. It is understandable that this perspective enjoys a resonance among property holders and enthusiasts, both in the economic discipline and more broadly in society, as it is reflection of a common sense that prevails in such quarters, but it provides an inadequate guide to understanding either democracy or development. This is because property rights play a more complex role in both phenomena than they acknowledge. Their view is ahistorical. It misses essential aspects of the colonial experience (such as the impact of ethnic and racial prejudices and solidarities based on the global color line) and its resulting legacies. It also misunderstands the sources of success of rising nations in the contemporary world, such as the role of developmental states.
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Building on the work of an earlier Nobel Prize winner in Economics, Douglass North, who had also emphasized that property rights protections are the elixir of growth, these authors did the same. [No matter that soon after winning the prize, and indeed in his very Nobel Prize lecture, North went on to adjust his message]. But they added more. Not only were property rights protections what brought about prosperity, but the explanation for whether these protections existed – blithely summarized as ‘good institutions’ – was whether they had been successfully transplanted from elsewhere. In their places of origin – in Europe – these good institutions had been chanced upon or developed, and maintained, for their combination of wealth generating properties – as North had argued – and their political appeal; particularly because the wealth that was allegedly widely distributed by ‘inclusive economic institutions’ was in turn protected by ‘inclusive political institutions’.
These good institutions were not transplanted everywhere, we were told, and this is what explained subsequent variation in economic performance. Then what accounted for where they were successfully transplanted? It came down to another splendid explanatory economy: whether a sufficient number of colonists had arrived on the scene, and further, been able to establish themselves as a dominant force, by beating back natives and disease. They had been able to do this in the temperate regions of the world with few and unpowerful indigenous people but not in the tropical regions teeming with inconvenient natives too numerous to be fully displaced or subordinated. In the latter, the colonial power settled for a more ‘’extractive” mode instead. This made the difference between the countries with ‘good institutions’ – settler colonies such as Australia, Canada or the US – and those with ‘bad institutions’ (all the others among those countries which had been directly or indirectly colonized). The mortality rates of European colonizers were both a direct explanation and an indirect indicator of success in transplanting good institutions. The great “natural experiment” of colonialism (not so easy to see it as such from the perspective of the colonized!), mediated by settler mortality and native population sizes, was seen as a way to learn about how institutions affect development.
The authors have made other arguments but this is their earliest and remains the most widely known. The idea of extractive institutions certainly captured something important, although it was not in itself especially original. Theorists of development known to readers of the political economy of development (and cited to a very limited extent by the authors) had long pointed out that the mining and plantation-centered economies of Southern Africa and of Latin America, for instance, retained central economic patterns which were legacies of colonialism, maintained for their own reasons by postcolonial elites. More recently, the idea of the resource curse had come into currency. Earlier authors had also long emphasized that colonies came in different kinds, in particular including privileged ‘mini-Europes’ and disprivileged others, the former containing citizens and the latter subjects. Then what of this thesis was original, and was what was original also good?
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Those many years ago, my first reaction was simple. In all of their statistical exercises involving the burden of disease for white settlers in the tropics, treated as a proxy for the (lack of) ability to establish good institutions, had they omitted a crucial insight which was right in front of them? As any student of statistics as applied to economics, or econometrics, knows, the use of the correct variables in ‘specifying’ the statistical test being done is quite essential, and applying the right interpretation to the variables one employs is equally important. I was tempted to call this omitted variable, ‘Kith and Kin’ (i.e. of the citizens of the European colonizer or ‘home country’). This variable would take on a value of one if a sufficiently large proportion of the population in a given colony belonged to this select category and zero otherwise. It is well known, after all, that for centuries large numbers of migrants left the British Isles and other places in Europe to settle elsewhere in the British Empire, and similarly in the case of some other European colonizers. These included not only the working classes but also at times the second and third sons of the affluent. Emigration provided a vital outlet for European workers in a time of demographic expansion and helped avert conflict at home by providing material opportunities as well as a chance to partake in the symbolic goods of imperialism including its racial order. Would it be at all a surprise if these ties of blood and culture led to ongoing benefits for the descendant populations? Already in the Wealth of Nations, Adam Smith had discussed the appropriate attitude of the mother country toward settler colonies as being that of a nurturing parent to a child. This variable would presumably be strongly correlated with the mortality of European settlers (with those places having higher mortality also ultimately having fewer people of European descent) and with the original population of natives (as a larger population of natives would presumably also lead to there being an ultimately smaller proportion of European descent). As a result, an analysis including this variable would have similar results as found by the authors, but a very different interpretation: the outsized successes of the ‘Anglo-Saxon’ peoples could be perceived as being due to blood being thicker than water, and not ‘good institutions’. Indeed, even without re-running the statistical analysis with this new variable one might simply reinterpret the existing analysis along these lines.
It is not for nothing that Winston Churchill wrote a History of the English-Speaking Peoples which focused on those tied by race as well as language, or for which reason such figures as Andrew Carnegie (in his day) and Conrad Black or Boris Johnson (in ours) speak of their political kinship. It is also well-known that in the British Empire – and similarly in the other colonial empires too, such as the French and the Portuguese – a system of Imperial Preference provided explicit benefits in the form of lower tariffs and other supports to the self-governing dominion overseas populated overwhelmingly by the descendants of British settlers – benefits which were denied to other subordinated colonies, which were handled in a mode of extraction instead of ‘co-prosperity’. The privileged British Dominions settled by kith and kin were, with the United States, the largest recipients of British overseas investment (in considerable measure financed by the proceeds of colonial enterprises elsewhere, because of their foreign exchange earnings from exports of tropical products to the rest of the world, which for Britain itself had begun to wane) during the nineteenth century. The various racial preferences that structured economic life, not only between different colonies but also within them, were extensive and have been well-documented.
Viewing the findings of the authors in terms of kith and kin, then, might seem to offer an alternative interpretation of the outperformance of those settler colonies that were not ‘burdened’ by diseases and natives. In short, the countries with ‘good institutions’ are those that the dominant powers of the age treated well and set off to a good start because of their special relationships with their kith and kin, while those with ‘bad institutions’ are those that they subjected to depredations or to varying degrees of underinvestment and benign neglect, because their primary use was to be pillaged; with the few kith and kin who remained there gaining benefits from being at the helm of an exclusionary and oligarchic structure. These countries also inherited political and institutional orders that remained oriented toward the management of subject populations rather than toward true self-governance by citizens. The idea that it is ‘good institutions’ and ‘bad institutions’ (defined by property rights protections) that matter is – in this reading – a false inference, with Kith and Kin being the more relevant explanatory factor. Whereas the former interpretation places the emphasis entirely on internal causes the latter recognizes that international economic relations played an important role in determining the possibilities for growth and development, and that these were structured in racially preferential ways. The failure to consider a kith and kin interpretation is only one example of the authors’ fast and loose, uneven, and baldly ideological, approach to concepts and to history.
The definition and protection of private property rights within an Anglo-Saxon framework of law seems to have been neither necessary nor sufficient for sustained economic growth. The most outstanding examples of countries that have escaped the economic periphery and moved toward the core of the world economy in recent years are the East Asian late developing economies. There, property rights, while often respected, were also maintained as ill-defined in order to be strategically manipulable by a developmental state (this is as much true of China today as it was of South Korea and Japan earlier). Even in the Anglo-Saxon derived countries, it is widely understood that private property may become an obstacle to economic growth and other public aims, for which reason it is accepted that a state may use eminent domain to construct vital infrastructure such as roads or dams. The locking up of ideas in the form of ‘intellectual property rights’ enforced by patents, copyrights and other means have also rightly come in for much criticism in recent years, and it is well understood even by mainstream economics that these generate sizable costs to society, by making useful goods and services unavailable to those who could benefit from them, and by damaging further innovation that builds upon the existing stock of ideas. Successful former British colonies that have seemingly embraced property rights protections have also selectively deviated from property rights orthodoxy in order to address particular challenges (for instance, in the case of Hong Kong and Singapore, restricting private land ownership rights to ensure availability of housing). It would seem, even within a perspective that accords importance to property rights, that property rights pragmatism – and neither property rights maximalism nor absolutism – enable development, by providing a balance between protections and exceptions, and by structuring rights in pragmatic and sensible ways.
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Perhaps the worst example of the authors’ inverted approach to concepts is that they describe the property rights-entrenching economies that they favor as ‘inclusive’, by way of contrast to resource-centered ‘extractive’ economies. But the existence or enforceability of property rights by themselves do not in themselves ensure inclusivity. Far from it. A property-owning democracy (as the philosopher John Rawls put it, drawing on the ideas of the British economist James Meade) with widely distributed ownership, along the lines envisioned in the early American republic, and drawing on English utopian ideals, is as different as night from day when compared with a plutocratic oligarchy. Many of the settler colonies that established robust private land ownership did so in a manner that permanently denied rights to land to the native inhabitants who had previously lived upon and benefited from it, in order to create land holdings of often enormous scale. These inequalities in turn have structured inequalities in an ongoing manner. This is as much true in Britain – where today’s still highly unequal landholdings have ancient provenance, and continue to have an impact on modern inequalities – as it is elsewhere, in its former colonies, both privileged and disprivileged. To assert, without qualification, that property rights protections are the basis of an ‘inclusive’ economy is to speak in a manner that borders on the positively Orwellian.
And what of ‘inclusive’ political systems? It should be noted that it was only in the Dominions privileged by their racial kinship with the mother country that self-governance and wide franchise existed within the colonial world, and there too after in some cases lengthy negotiations. In all of the other colonies, on the other side of the global color line, political power was jealously guarded and doled out slowly, fitfully, and limitedly. Where (almost everywhere) political systems established under colonialism were not ‘inclusive’ that is primarily because there were too many and too restless a group of natives who had to be excluded, in order to maintain the political and therefore the economic supremacy of the settlers. In the privileged settler colonies, in which the natives were – or came to be, at times due to murderous or even genocidal actions – small in number, and which natives’ traditional rights were extinguished by fiat, an ‘inclusive’ political system could be established without sacrificing settler privileges. The count of the natives was too small for them to count. Inclusivity was made possible by prior exclusion. If this was inclusivity, then, it was frequently the inclusivity of the desert.
That inclusive political institutions (including in particular democracy) have many advantages, such as providing a framework for the management of internal conflicts, is not in doubt, and has long been recognized, and is one of the main reasons for its origination and widespread adoption. But such inclusion has a complex history, in which the claims of property owners have at times driven a demand for what we have later come to see as democratic claims (as in the case of the Magna Carta) and which have sometimes led in a contrary direction (which is one reason why many defenders of property have sought to constitutionally protect it from the reach of democracy). The idea that all good things go together is central to the authors’ perspective. But their conception of the good things is unusually narrow and does not permit a recognition of the tensions that exist between the different aspects of ‘good institutions’, as they themselves describe them. It is wholly plausible, although not original, to argue that inclusive economic systems and inclusive political systems enjoy a complementarity (or to use an earlier language, an elective affinity). What is less plausible – although it is decidedly original – is to give priority to property rights in defining and interpreting these terms.
Even if one sees widely distributed property rights as a guarantor of liberty and of sustainable political inclusion (as did early republicans in America and elsewhere) there is the question of how best to attain and to sustain them. Entrenching property rights in law can be as harmful as it can be advantageous, as it may threaten to freeze a highly unequal, unjust and plausibly also inefficient, order in place. Much depends upon the specific conditions that obtain.
The case of concentrated land holdings deriving directly from the exclusionary acts of settler colonialists provides a particular case of the more general problem. The ongoing impact of historical injustices calls out for some correction, with it being plausibly argued that efficiency as well as equity can thereby be advanced, at least if the corrective is designed and implemented carefully. It is no accident that land reforms and calls for wider land rights, especially but not exclusively for indigenous people, have been a central political demand in many countries. But in such a case, the property rights of some are likely to have to be weakened or qualified in order for property for others, or rights more generally, to be secured.
The maxim of property protections uber alles hardly serves societies well. It may be objected that this was not what is intended. In that case, there is a need for a more adequately calibrated theory of how and when property rights of different kinds matter, and why.
Being for or against property rights is as silly as being for or against culture. As welcome as it is to try to cut through the fog, the question must be more nuanced than that. What arrangements of rights work best for specific purposes is an important question. But reducing it to one of whether institutions ‘matter,’ where institutions are largely reduced to property rights protections, and in turn run together with ‘inclusivity’, seems primarily an ideological act, and an evasion of the responsibility adequately to understand the world, let alone to change it.
Why does a hypothesis phrased in a simplistic way enjoy such influence? There are many explanations. Under-complicated framings (e.g. geography matters vs. institutions matter) derive from the scientistic atmosphere of mainstream economics. The fact that the prevailing, and indeed the most appealing, hypotheses, may be the products of intellectual or cultural prejudices and blinders do not come in for much self-inspection. The ideas gain influence because they are produced by insiders, who are legitimated by their place in apex institutions, giving them a bullhorn, helping to disseminate the ideas widely, and garnering for them a presumption of authority and legitimacy. And they are enabled by a prevailing supposition – not wholly without justification – that property rights protections are of great importance in encouraging good husbanding, investment, and entrepreneurship.
Is there a lesson? “It’s complicated” is not enough, but neither is, “It’s simple”. Occam’s Razor has much to recommend it, but so does the maxim attribute to Einstein: a framework for understanding “should be as simple as possible, but not simpler”.
It is good form to credit the winners of an award with an achievement. But the problem is that the Nobel Prize in Economics generates an implied hierarchy of knowledge, and rewards particular ways of thinking. This in turn has great consequence for what ideas are spread and adopted, within the discipline and in the world at large – a world needing answers. For this reason, it is too important to ignore.
Sanjay G. Reddy is Professor of Economics at The New School for Social Research. Views are personal.
The article was originally published on Reddy’s blog, reddytoread.com.
