Creative Crisis in Democracy and Economy

Creative Crisis in Democracy and Economy

.

George C. Bitros Anastasios D. Karayiannis Creative Crisis in Democracy and Economy

George C. Bitros Professor of Political Economy, Emeritus, Athens University of Economics and Business Athens Greece Anastasios D. Karayiannis Late Professor of Economics University of Piraeus Piraeus Greece ISBN 978-3-642-33420-7 ISBN 978-3-642-33421-4 (ebook) DOI 10.1007/978-3-642-33421-4 Springer Heidelberg New York Dordrecht London Library of Congress Control Number: 2012955050 # Springer-Verlag Berlin Heidelberg 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, 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. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Preface Many ordinary as well as educated citizens in Western democracies have made it a habit to blame the organisation of their economies for every real or imaginary malaise. Markets are blamed for unemployment, inflation, inequality, poverty, etc., because they allow capitalists to pursue their insatiable greed without restraint. However, one must concede that most, if not all, of the progress achieved over the millennia, from the lengthening of life itself to the immense improvement in living standards, is due to market-based institutions and the incentives associated with them. The late Prof. Karayiannis* and myself found it most surprising how few understand that, while a free market economy without democracy can exist, the opposite is impossible. It seems inexplicable that so many citizens declare their support of democracy and yet, simultaneously, welcome further government controls or even elimination of free markets. The objective in this book is to highlight the relationship between democracy and free markets, so as to make it clear that, when citizens encourage or even welcome the imposition of restrictions on property rights and voluntary exchanges, not only do they undermine their own liberties, but they also slowly and surely contribute to the erosion of the only means to social progress, i.e. the mobilisation of self-centred human actions via the free markets in the economy. Our view is that, with the exception of (a) the temporary and highly beneficial shocks caused by technological progress and (b) the shocks emanating from natural disasters, all other undesirable developments in market-based democracies are induced and prolonged by government failures. To corroborate our premise, we invoke arguments and evidence in two parts. In the first part, we focus on the operating principles, problems, and results achieved by societies organised politically and economically where a minority cannot make decisions on matters of common interest without the majority s consent. We start this journey in history with the invention of market-based direct democracy in ancient Athens roughly 25 centuries ago. We continue with the reemergence of democracy two centuries ago * He passed away early in 2012. With the exception of a few minor changes necessitated by this event, the preface is identical to the one we wrote for the 2011 edition of this book in Greek. v

vi Preface in the West, in the form of classical representative democracy. Then, we turn to the contemporary representative democracy that came about as a result of the economic crisis of 1929. Lastly, we close this part with an assessment of the prospects for direct digital democracy in the context of the technological progress in information, computing and communication sciences. This first part is general. It places emphasis on the principles that render free markets a sine qua non condition for democracy and not on the results from their particular application in a given country or time period. In the second part, we present a case study, explaining in considerable detail how these principles were applied, and what the outcome was in Greece since the Second World War. During this period Greece went from a period of spectacular economic growth (1954 1974) to a period that led to her current economic calamity (1974 2010). Thus, we can draw many lessons regarding how governments should behave in order to avoid the pitfalls that are inherently associated with representative democracy. If we had to choose only one among our many important conclusions, we would say without any reservation that this has to do with the cost citizens absorb by granting sovereign rights to agents (i.e. the politicians) to decide on their behalf in vital issues of democracy. This cost is so high that citizens in all democracies may be expected eventually to act so that representative democracy converges to direct democracy through the processes explained in Chap. 8. Our hope is that this will happen sooner rather than later with the help of the revolutionary changes in the scientific fields we mention. But until the political systems are forced to reform in this direction, the key for citizens in democracies to regain control of their future is a return to a substantive separation of powers, i.e. the dispersion of political and financial decision making to as many independent centres as is wisely possible. This book constitutes a natural extension of our research in recent years into the nature of the relationship between institutions and economic development, with a focus on classical Greece. Initially, we aimed to present a limited comparative generalisation with reference to more recent experiences. But we fell into the usual trap, where one important issue leads to another more important issue, and it took us 3 years until the Greek edition of our book was published late in 2011. Then, as if this delay were not agonising enough, there happened the unexpected. Anastasios, my beloved friend, colleague and co-author in several publications over many years, died suddenly in early 2012 and all the burdens for the present edition of the book fell on my shoulders. This explains why I bear full responsibility for the quality of the translation and why it gives me great pleasure to thank Maria Choupres for her precious assistance in this regard. Also, many friends and colleagues were kind enough to read several chapters and provide us with constructive comments. I thank them all, particularly for their warnings about the difficulty and the risks we faced. Among them Dimitri Vayianos, Stavros Drakopoulos, Nickolaos Kyriazis, George Economou, George Tridimas and Costas Christidis offered us assistance and advice beyond the limits that friendship and collegiate solidarity would call for. I am grateful for their help and absolve them from any responsibility for errors or deficiencies in the text. Athens, Greece George C. Bitros June 15, 2012

Contents 1 The Athenian Democracy... 1 1.1 Introduction... 1 1.2 The Invention of Democracy........................... 2 1.3 Organisation and Operating Principles of Democracy... 5 1.4 Stylised Features of Ancient Athenian Economy............ 14 2 The Classical Democracy... 23 2.1 Introduction... 23 2.2 From Direct to Representative Democracy... 25 2.2.1 Delimiting the Power of Rulers................... 25 2.2.2 Protection of Property Rights.... 26 2.2.3 Separation of Powers..... 27 2.2.4 Recall of Elected Officials... 28 2.2.5 Appointment After Election...................... 28 2.3 Main Problems of Representative Democracy.............. 29 2.3.1 Asymmetry of Information in Representation... 30 2.3.2 Political Parties as Mechanisms of Special Interests..... 31 2.3.3 On the Representativeness of Governments........... 32 2.4 The Causes of the Wealth of Nations..................... 33 2.5 Functions and Size of the State... 35 2.5.1 Smith s Views on Education..... 37 2.5.2 Smith s Views on the Welfare State.............. 38 2.5.3 Smith s Views on Market Regulation............... 38 2.6 Properties and Problems of the Free Market Economy... 39 2.6.1 Accumulation of Capital and Economic Growth... 40 2.6.2 Monetary Disturbances... 42 2.6.3 Lack of Adequate Aggregate Demand... 43 2.6.4 Market Rigidities and Price Distortions.............. 44 2.6.5 Two Catalytic Roles of Entrepreneurship............ 45 2.7 What do Historical Comparisons Reveal... 48 2.8 Democracy with a Free Market Economy and a Small State.... 49 vii

viii Contents 3 The Contemporary Democracy... 53 3.1 Introduction... 53 3.2 How Much and How the State Grew After 1929... 54 3.3 Why the State Grew Gigantic........ 58 3.3.1 Unfortunate Juncture........................... 58 3.3.2 The Impact of Keynesian Ideas and Recommendations... 59 3.3.3 Dysplasias of the Patronising State... 63 3.4 Repercussions on Democracy.......................... 68 3.4.1 Electoral Cycle.... 68 3.4.2 Malicious Interlocking and Corruption.............. 69 3.4.3 Bureaucracy... 70 3.4.4 Uncoordinated Administrative Polycentrism..... 72 3.5 Repercussions on Society... 72 3.5.1 Loss of Sovereignty and Individual Liberties... 72 3.5.2 Erosion of Institutions, Values and Social Cohesion.... 74 3.6 Repercussions on the Economy..... 76 3.6.1 Policies Which Create Macroeconomic Imbalances and Curb Growth... 77 3.6.2 Policies Which Introduce Rigidities and Raise Production Costs....... 77 3.6.3 Policies That Discourage Entrepreneurship and Investment... 80 3.6.4 Policies That Militate Against Economic Efficiency.... 82 3.7 Recent Developments and Prospects...... 83 4 Digression on Social Democracy... 87 4.1 Introduction... 87 4.2 The Problem Posed by the Social Contract................. 88 4.3 Solutions Simulated by Democracies... 89 4.3.1 The Approach of Classical Democracy........... 89 4.3.2 The Approach of Contemporary Democracy... 90 4.4 The Claims of Social Democracy and Why They Are Infeasible......................................... 91 4.4.1 Impossibility to Address the Free Rider s Problem... 91 4.4.2 Indeterminacy Regarding Equality................. 93 4.4.3 Distortion of the Principle of Solidarity...... 94 4.5 Timely Reminder of a Prophetic Warning... 96 5 Revival of the Ideas of Classical Democracy... 101 5.1 Introduction... 101 5.2 Fundamental Defects of Keynes Model........... 102 5.2.1 Criticisms Regarding the Assumptions.............. 102 5.2.2 Criticisms Regarding the Capabilities of Policy Authorities... 104

Contents ix 5.3 The Push Towards a New Classical Democracy... 106 5.3.1 Principles for a New Classical Democracy and Governance..... 107 5.3.2 Specifications of Economic Policy................. 113 5.4 The Battle for the Minds and Hearts of Citizens.... 119 5.5 An Assessment of the Economic Policies of Reagan and Thatcher..... 120 5.5.1 In the USA under Reagan... 121 5.5.2 In the UK under Thatcher... 122 5.6 Prospects... 124 6 Democracy in the World and Globalisation... 127 6.1 Introduction... 127 6.2 Comparative Advantages of Democracy..... 128 6.2.1 First Criterion: Political and Civil Liberties...... 128 6.2.2 Second Criterion: Contribution to Economic Growth... 131 6.2.3 Third Criterion: Humanitarian and Economic Assistance................................... 133 6.3 Determinants and Effects of Globalisation............. 135 6.3.1 The Forces That Drive Globalisation..... 135 6.3.2 Effects of Globalisation......................... 137 6.4 Assessment of the Arguments Against Globalisation......... 139 6.4.1 Globalisation Reduces National Sovereignty.......... 139 6.4.2 Globalisation Increases Poverty................... 140 6.4.3 Globalisation Promotes Consumerism...... 140 6.4.4 Globalisation Leads to Depletion of Natural Resources..... 141 6.4.5 Globalisation Harms the Environment.... 141 6.4.6 Globalisation Destroys the Diversity Among Peoples and Leads to the Disappearance of Their Cultural Heritage....... 142 6.5 Immigration, Illegal Immigration and Terrorism............. 143 6.5.1 Immigration................................. 143 6.5.2 Illegal Immigration... 145 6.5.3 Terrorism..... 147 6.6 Allocation Models of International Property Rights... 148 6.7 Objectives and Institutions of Global Governance...... 150 7 Democracy, Free Market Economy and European Unification... 153 7.1 Introduction... 153 7.2 Attempts at European Unification...... 153 7.2.1 Unification by Force..... 154 7.2.2 Unification Through Cooperation.................. 154 7.3 Drivers of Enlargement and Unification in Europe..... 155 7.3.1 Milestones in the Unification Process Up to Date... 155

x Contents 7.3.2 Tactical and Strategic Considerations... 157 7.4 Towards a Single European Market..... 158 7.4.1 The Objectives of Economic Integration........ 158 7.4.2 Mechanisms and Means of Economic Integration...... 160 7.4.3 Achievements and Outstanding Problems... 165 7.5 The Challenges of Political Integration.... 170 7.5.1 The Current Stage............................. 171 7.5.2 The Forces That Push Towards Federalism........... 172 7.5.3 Progress Through the Criticisms of Eurosceptics...... 173 7.5.4 Roadmap of Principles and Priorities............... 175 8 Democracy in the Future and the New Welfare State... 179 8.1 Introduction... 179 8.2 Technological Developments and the Future of Democracy.... 179 8.3 Roles of the State in Future Democracy... 185 8.4 The Issue of Inequality..... 189 8.5 Towards a State of Equal Opportunities..... 193 8.5.1 Access to Knowledge...... 193 8.5.2 Access to the State and the Markets..... 194 8.5.3 Safety Net Against Uninsured Risks and Uncertainty.... 195 9 The Case of Contemporary Greece... 197 9.1 Introduction... 197 9.2 The Economy: 1950 2010... 198 9.2.1 Economic Growth and Its Sources................. 198 9.2.2 Investment and Investable Resources...... 201 9.2.3 Economic Structure and Competitiveness...... 208 9.2.4 Deficits and Debt.... 216 9.2.5 Summary of Findings...... 219 9.3 Why Things Came Upside Down... 221 9.3.1 Effects of Changes in Institutions..... 221 9.3.2 Effects of Economic Policies..................... 226 9.3.3 Effects of Globalisation......................... 239 9.4 Overall Assessment................................. 245 Bibliography... 249 Index of Authorities... 267 Author Index... 269 Subject Index... 275