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- Author or Editor: Barry R. Weingast x
Does liberty matter for economics? To address this question, I distinguish among three different types of liberty: Adam Smith’s, the neoclassical, and the so-called “classical liberal.” They differ in that the neoclassical and the classical liberal perspectives presume the existence, typically without noting it, of the four conditions that comprise the foundation of liberty, namely, secure property rights, enforcement of contracts, absence of government predation, and security. In contrast, Adam Smith sought to explain these foundations. In this article—an extraliterary review of one of the central themes of Acemoglu and Robinson (2019)—I draw the implications of Smith’s approach, and I explain why neoclassical economics—which takes the foundations of liberty as given—is unable to understand the work of Smith on this topic and, hence, on economic development. I also show that the neoclassical and the classical liberal approaches rest on a foundation of magic: they both presume the foundational conditions just noted but fail to explain how they arise. Put simply, the neoclassical approach has no explanation for the origin of liberty or of the mechanisms that sustain it. If markets require the four conditions of the foundation of liberty, then a complete explanation of the origin and development of markets must include an explanation of how these conditions come to hold. The Smithian economic perspective is especially important for today’s developing countries, most of which, at best, struggle to create the four foundational assumptions of liberty.
Why did states dominate investments in economic development in early America? Between 1787 and 1860, the national governments spent $54 million on transportation infrastructure while the states spent $450 million. Using models of legislative choice, we show that Congress could not finance projects that provided benefits to a minority of districts while spreading the taxes over all. Although states faced the same political problems, they used benefit taxation schemes that coordinated taxation and benefits – for example, by assessing property taxes on the basis of the increase in value due to an infrastructure investment. The US Constitution required the federal government to allocate direct taxes on the basis of population, effectively prohibiting benefit taxation. As a result, federal government expenditures were concentrated in collections of small projects – such as lighthouses and rivers and harbours – that spent money in all districts. Federal inaction was the result of the equilibrium political forces in Congress, and hence an equilibrium impotence.
Why do developing countries fail to adopt the institutions and policies that promote development? Our answer is the violence trap. Natural states prevent violence by providing rents to those with high violence potential. To create rents, however, they must limit entry, which hinders the development of a complex economy whose workings will be seriously disrupted by domestic conflict (raising the cost of fighting) and whose profits will be hard to confiscate (lowering the benefit). Thus, natural states' policy of rent creation hinders the development of the sort of complex economies that would lower the expected payoff to fighting for control of the state. Empirically, we show that economic complexity (as measured by the Hidalgo- Hausmann index) strongly deters coups, even controlling for GDP per capita and level of democracy. Our results remain similar when we instrument economic complexity using the mean complexity of each country's neighbours.
