Leadership or Chaos • Norman Schofield Maria Gallego Leadership or Chaos The Heart and Soul of Politics In collaboration with Jee Seon Jeon and Ugur Ozdemir 123 Prof. Norman Schofield Assoc. Prof. Maria Gallego Washington University in St. Louis Wilfried Laurier University Center in Political Economy Department of Economics Brookings Drive 1 University Ave. West 75 63130 St. Louis Missouri N2L 3C5 Waterloo Ontario Campus Box 1027 Canada USA [email protected] schofi[email protected] ISBN 978-3-642-19515-0 e-ISBN 978-3-642-19516-7 DOI 10.1007/978-3-642-19516-7 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011933664 c Springer-Verlag Berlin Heidelberg 2011 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: eStudio Calamar S.L. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Dedicated to Phoebe Ahn Schofield, born February 28, 2011, and Maria’s father and mother Humberto Gallego and Amparo Jaramillo. • Foreword Equilibrium and chaos. Evolution and revolution. Risk and uncertainty. Knowledge and belief. Heart and soul. In this book, Norman Schofield and Maria Gallego argue that to understand our past, and thus our future, we need to think hard about these contradictory pairs. In their view, we blind ourselves by focusing on only one side of the pair and ignoring the other. Thus, political economists who focus on equilibrium often ignore the ways in which equilibrium changes. While these changes can be evolutionary, gradual and peaceful, they are sometimes revolutionary. Revolutions strike with little warning, and often bring violent change, in ways that seem unpredictable or chaotic. Indeed, if the authors are right, revolutions are chaotic in the most precise technical sense. But, they warn us, it is not all chaos. Even though some equilibria are fragile, some are not; many societies are stable, and changes are regularized and controlled. Those who focus on chaos miss the order that characterizes equilibrium. Indeed, they often find those orders incomprehensible and baffling. In their chapters on elections, Schofield and Gallego show the different political orders induced by different electoral systems. In making their arguments, Schofield and Gallego use the tools of modern political economy. They develop models and bring those models to the data, both quantitative and qualitative. Yet they are careful to show the roots of their program, of the questions they ask and the answers they give. Their fundamental question is: Why are some societies so much more hospitable to human flourishing than others? Their answer, to the Marquis de Condorcet and to James Madison and Thomas Jefferson, is that it’s the institutions and the incentives they create. Those who think that political economy has no soul will find much here to give them pause. Many times over, the authors point out the ways in which political vii viii Foreword activists use their understanding of the logic of politics to remake the world to their liking. If they are right, then they have produced a handbook for real radicals, those who want to get to the root of the political economy. California Andrew Rutten March 25, 2011 Preface The bases of modern social and natural sciences are due to Thomas Hobbes in his Leviathan of 1651 and Isaac Newton in his Philosophiae naturalis principia mathematica of 1687. Newton’s work, particularly the Optiks (1704), as well as his underlying philosophy of science, was transmitted throughout Europe by Voltaire’s book on the Elements of Newton’s Philosophy (published in 1738). The human sciences, and especially political economy and moral philosophy, were developed further in France by Etienne Condillac’s Essay on the Origin of Human Knowledge (1746) and Turgot’s Reflections on the Formation and Distribution of Wealth (1766), and in Scotland by David Hume’s Essays Moral, Political, and Literary (1742) and A Treatise of Human Nature (1752), culminating in Adam Smith’s The Theory of Moral Sentiments (1759) and Wealth of Nations (1776). Finally in 1785 and 1795, the Marquis de Condorcet first published his Essai sur l’application de l’analyse a` la probabilitie´ des voix (Essay on the Application of Analysis to the Probability of Decisions)andthenEsquisse d’un tableau historique des progres` de l’esprit humain (Sketch for an Historical Picture of the Progress of the Human Mind). In one sense, this present work is an attempt to extend the Condorcetian logic as expressed in the formal apparatus of the Essai in an effort to judge whether the optimism of the Esquisse is justified in a world where a large proportion of humanity lives in what has been termed the Malthusian trap of growing population, poverty and tyranny. The formal apparatus of economic theory has developed apace since the time of Adam Smith’s Wealth of Nations, in the work of Ricardo, Pareto, Walras and Marshall, culminating in the mathematical existence theorems for a competitive equilibrium. (Vo n N e u m a n n 1932; Arrow and Debreu 1954; McKenzie 1959). In contrast to the theoretical efforts on the economic side of political economy, almost no work on formalizing Condorcet’s insights, in his Essai on the political side of political economy, was attempted until the late 1940s, when Duncan Black and Kenneth Arrow published seminal papers on this topic. In 1948, Duncan Black published his paper “On the Rationale of Group Decision Making,” and specifically addressed the question of existence of a voting equilibrium. He followed this in 1958 ix x Preface with his monograph on The Theory of Committees and Elections. The monograph emphasized the importance of Condorcet’s work in voting theory, but paid much less attention to the Condorcet Jury Theorem. In contrast, recent research has suggested that this latter theorem gives a justification for majority rule as a “truth seeking” device. Arrow’s paper, “A Difficulty in the Concept of Social Welfare” (1950) derives from quite a different tradition of formal political economy, namely the work in welfare economics of von Mises (1920), Bergson (1954), Lange (1938), Schumpeter (1942), von Hayek (1944) and Popper (1945). Arrow shows essentially that any social welfare function (that maps families of individual preferences to a weak social preference) is either imposed or dictatorial. To obtain what Arrow termed this “possibility theorem,” he assumed that the social welfare function had universal domain and satisfied a property of positive association of preferences. As Arrow commented in his paper, the negative result of the “possibility theo- rem” was “strongly reminiscent of the intransitivity of the concept of domination in the theory of multiperson games” as presented in von Neumann and Morgenstern (1944). Arrow also emphasized that he viewed the theorem as relevant to a situation where individuals make value judgments, rather than to the more typical economic context where agents make choices based on their tastes. Since all political choices are based, to some degree or other, on the aggregation of values, we further infer that the “possibility theorem” addresses not just the traditional questions of welfare economics, but the larger issue of the interaction between the political and economic realms. In other words, the relevance of the theorem is not simply to do with the question of voting cycles, or intransitivities, but concerns the larger questions of political economy. The formal exercise of proof of existence of an economic equilibrium (obtained between 1935 and 1954) leaves unanswered many questions. For example, can the existence proof be extended from the domain of private commodities to include public goods? More particularly, can democratic procedures be devised to ensure that preference information be aggregated in an “efficient” fashion so that social choice is welfare maximizing. Arrow’s possibility theorem suggests that democracy itself may be flawed: indeed it suggests that democratic institutions may (as Madison foresaw in Federalist X) be mutable or turbulent. Thus difficult questions of institutional design need to be addressed. These questions come back in one sense or another to an interpretation of Arrow’s Theorem. In the rest of this volume we shall attempt to outline our sense of the current state of the debate. Chapter 1 first sketches one way of interpreting Arrow’s Theorem. Since the theorem refers to the aggregation of preferences, we argue that any society or legislature can potentially fall into disorder. However, if social decisions also depend on the aggregation of beliefs, then it is possible, as Madison argued in Federalist X, that voters will base their judgment of political leaders on the perception of the leaders’ inherent or intrinsic quality. This suggests analyzing elections using the formal idea of valence. This electoral model is presented as a heuristic device to examine what are called social contracts, instituted at times of social quandary. The Preface xi chapter briefly discusses social quandaries in Britain and the USA in the period from 1688 to the present. One purpose of Chap. 1 is to interpret the understanding of the Founders in terms of the Scottish and French Enlightenments.