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IDEOLOGY AND THE EVOLUTION OF VITAL INSTITUTIONS:

GUILDS, THE GOLD STANDARD, AND MODERN INTERNATIONAL COOPERATION

by

Earl A. Thompson, University of California, Los Angeles

and

Charles R. Hickson, Queens University, Belfast






TABLE OF CONTENTS

 FOREWORD by Armen Alchian       																						xiii

 PREFACE 																									xv

 ACKNOWLEDGEMENTS        																							xvii

 PROLOGUE        																								xix

 Chapter 1  OVERVIEW     																							1
    I    An Example:  Significant Bilateral Exchange     																			2
    II   Generalizing the Example:  A Theory of Social Organization      																	4
    III  How Optimality Criteria Depend upon the Political Environment   																	7
    IV   Rationalizing Citizen-Efficiency and Distributional Advice      																	9
    V    The Need for a Rapid Adjustment Process 																				10
    VI   Achieving Rapid Adjustment:  Vitalness and Effective Democracy  																	10
    VII  The Economic Benefits of Effective Democracy: Efficiency Tests  																	12
    VIII The Impermanence of Dominance   																					13
    IX   A Brief Readers' Guide for Specialists  																				14
    X    The Evolutionary Argument:  A More Detailed Readers' Guide      																	14
    XI   Extension to Biology:  An Evolutionary Principle        																		18
    XII  A Summary of the Policy Framework       																				18

 Appendix A.1  POTENTIAL COOPERATION, UNDERDEVELOPMENT TRAPS, AND THE ECONOMIC EFFICIENCY OF DEMOCRACY       													20
         Abstract and Introduction       																					20
    I    The Absence of Traps under Wholly Noncooperative, Perfect Information, Interaction 															31
    II   Inevitable Underinvestment Traps under Potential Cooperation    																	33
    III  Zero-Investment Solutions and an Optimal Legal Policy   																		36
    IV   Applications    																							40
    V    Summary 																								49

 Chapter 2  THE EFFICIENCY PROBLEM, THE DISTRIBUTION PROBLEM, AND A POSSIBLE SOLUTION 																51
    I    The Efficiency Problem  																						51
            A.  The Evolution of Vital Organs in General 																			51
            B.  Effective Democracy and Vital Economic Institutions      																	70
            C.  The Consequences of Economic Ideology    																			76
    II   The Distributional Problem      																					82
            A.  The Free International Competition for People    																		82
            B.  Earlier Civilizational Blossomings       																			84
            C.  The Costly Reversion to Empire   																				85
            D.  The Prospective Surrender of Popular Democracy   																		86
    III  A Constitutional Solution       																					88

 Appendix A.2  THE SOCIAL OPTIMALITY OF NARROWLY RATIONAL BEHAVIOR IN NONCONFLICTUAL INTERACTIONS     														89
         Abstract and Introduction       																					89
    I    A Collectivist's Optimality Theorem     																				90
    II   A Generalization Allowing for Ungrateful Future Decisionmakers  																	94
    III  Imperfect Information   																						95
    IV   Supplying Vital Institutions to a Territorial Society   																		95

 Chapter 3  A NEW INTERPRETATION OF GUILDS, TARIFFS, AND  LAISSEZ FAIRE   																	97
         Abstract and Introduction       																					97
            A.  An Evaluation of The Traditional View of Political Economy       																97
            B.  A New Approach to Political Economy      																			113
    I    An Efficiency-Based Theory of Democratic Political Associations 																	115
            A.  The Citizen-Efficiency of Effective Democracy    																		115
            B.  The Effect of Faulty Political Values and Erroneous Economic Information   															119
    II   Efficient Guild Policies        																					128
            A.  The Two Primary Social Functions of Guilds       																		128
            B.  Ancillary Defense Functions of Guilds    																			130
            C.  The Interaction Between the Two Primary Functions of Guilds      																134
            D.  Actual Guild Policies    																					135
            E.  Geographical Extensions  																					168
            F.  The Central Lessons of Guild-History     																			172
    III  The Economic Policies Generated by Protectionist Lobbies        																	172
            A.  Optimal and Actual Trade Restrictions    																			173
                    Under Interregional Import Competition
            B.  The Historical Lives of Various Tariff Policies  																		179
            C.  An Evolutionary Reason for Popular Government    																		184
            D.  Why Countries Experiencing Exceptionally High Growth Rates Have Imposed Exceptionally High Effective Tariff Rates 										185
            E.  A Contrast Between Guild History and Pre-20th Century Tariff History  																186
    IV   Policy Conclusion:  On the Beating of Live Horses       																		188

 Chapter 4  ON THE GOLD STANDARD:  WHY DEPRESSIONS HAVE BEEN A NECESSARY EVIL, OR HOW THE ECONOMICS OF KEYNES DETHRONED EUROPE  										189
         Abstract        																							189
         Introduction:  Emergency Finance and the Gold Standard  																		189
    I    Mainstream Macroeconomics and the Gold Standard 																			193
    II   Business Cycles and the Gold Standard   																				195
    III  The Broad Price Trends Observed Under the Gold Standard 																		197
    IV   Emergency Finance after the Gold Standard                       																	198

 Chapter 5  ON MODERN INTERNATIONAL COOPERATION:  EXCHANGE CONTROLS, HYPERINFLATION, AND COSTLY SOCIAL REVOLUTION AS EFFICIENT NATIONAL RESPONSES TO EXTERNALLY IMPOSED TRADE LIBERALIZATION      		201
         Abstract and Introduction       																					201
    I    The Primary Western Policy Imposition and the Responses of the Dependent Nations      															204
            A.  General Specification and Preliminary Critique   																		204
            B.  On Brutocracy    																						206
            C.  The Initiating Policy Imposition 																				209
            D.  The Primary Small-Country Response       																			209
            E.  Extremely Dependent Nations and Hyper-Repressive Government      																212
            F.  2nd-Order Dependencies and Hyper-Savings 																			213
            G.  4th-Order Dependencies and the Economics of Revolution   																	217
            H.  Filling the Gap  																						222
    II   Peacetime Hyperinflation as a Rational Response to Dominant-Country Reactions to Permissible Exchange Controls     											223
            A.  Inexpensive Commitment Eras:  Accommodative Trade Liberalization   																225
            B.  Costly Commitments Eras:  Dominant-Country Reactions to Exchange Controls      															226
    III  A Model of Rational Hyperinflation      																				235
    IV   Statistical Analysis    																						246
    V    Graphical Summary       																						250
    VI   Conclusions     																							250
            A.  On Economic Ideology:  A Test for Political-Economic Hubris      																250
            B.  Optimal Economic Policy  																					255

 Appendix A.5  STATISTICAL PROCEDURES    																					257

 Chapter 6  SUMMARY, POLICY IMPLICATIONS, AND A FINAL TEST       																		259
    I    Vital Institutions and Civilizational Upturns          																		259
    II   Civilizational Downturns and How to Avoid them         																		260
    III  Avoiding the Pending Distributional Disaster           																		263
    IV   Does Economics Have another Lesson for Biology?        																		266
    V    Life in the Fast Lane          																					270
    VI   An Intellectual Effect of the Proposed Policy          																		271

 B-APPENDICES (Previously published)            																				273
    Appendix B.1  Social Interaction Under Truly Perfect Information (with Roger L. Faith)           														273
    Appendix B.2  Taxation and National Defense         																			289
    Appendix B.3  An Economic Basis for the "National Defense Argument"for Aiding Certain Industries        													317
    Appendix B.4  The Theory of Money and Income Consistent With Orthodox Value Theory        															353

 REFERENCES FOR THE TEXT AND A-APPENDICES               																			381

 INDEX          																			       					397

 LIST OF TABLES

 3.1     THE REPLACEMENT OF THE ADMINISTRATIVE ROLE OF GUILDS WITH CIVILLY REVERENT BUREAUCRATS        														150

 3.2     THE REPLACEMENT OF GUILD ENTRY RESTRICTIONS WITH NATIONAL CAPITAL TAXES             															158

 3.3     THE INTRODUCTION OF CONVERTIBLE CURRENCIES AND THE ACCELERATED DECLINE OF GUILDS           														163

 5.1     DOMESTICALLY EFFICIENT RESPONSES TO EXTERNALLY IMPOSED TRADE LIBERALIZATION IN DEPENDENT NATIONS WITH VERY HIGH DEFENSE-EXTERNALITIES            							224

 5.2     PREDICTING INFLATION, 1989-1990         																				248

 5.3     PREDICTING INFLATION, 1986-1988         																				249

 5.4     PREDICTING INFLATION, 1976-1978 		        																		249

 LIST OF FIGURES

 5.1     THE EXCHANGE CONTROL EQUILIBRIUM                																			237

 5.2     THE HYPERINFLATIONARY EQUILIBRIUM                       																		240

 5.3     THE MARGINAL RETURNS AND COSTS OF INFLATION                     																	244

 LIST OF GRAPHS

 1       INFLATION AND EXCHANGE CONTROLS: 1989-90 (IMF MEMBERSHIP)                        															251

 2       INFLATION AND EXCHANGE CONTROLS: 1989-90 (NON-IMF MEMBERSHIP)                    															251

 3       INFLATION AND EXCHANGE CONTROLS: 1986-88 (IMF MEMBERSHIP)                        															252

 4       INFLATION AND EXCHANGE CONTROLS: 1986-88 (NON-IMF MEMBERSHIP)                    															252

 5       INFLATION AND EXCHANGE CONTROLS: 1976-78 (IMF MEMBERSHIP)                        															253

 6       INFLATION AND EXCHANGE CONTROLS: 1976-78 (NON-IMF MEMBERSHIP)                    															253


FOREWORD

            Why does a book have a foreword? To tell what it's about? Apologize for it? Summarize it? One purpose is to prepare the reader for the "journey". Thus this foreword first warns that standard, strongly held beliefs about policies for development and survival of nations are severely challenged. And if your are not willing to run the high risk of having your present confident understanding turned upside down, you shouldn't read this book. I speak from prior personal experience with Thompson's publications. What appears upside down at first begin to look right-side-up -- from the newly acquired but very lonely Thompsonian perspective. The ideas in this book will surely haunt, alter and broaden your view of history and development of national political and economic actions.

            More explicitly, Thompson and Hickson strongly challenge the standard interpretation of the basis of growth and viability of dominant wealthy nations. Briefly, efforts of the economically wealthy and the government leaders to increase their wealth and protect it from aggressors, internal and external, are cast in a new evolutionary light. The challenge is to the idea that societies leading intellectual formulators of political and social policy have been helpful. Their alternative, and persuasive, interpretation is that the rise and survival of wealthier nations has been achieved because of an "effective democracy". That's one in which: (a) investors participate in advising pragmatic legislators to protect their investments from private and public expropriation, and (b) a civilly reverent bureaucracy faithfully administers apparently unfair, inconsistent and ideologically unjustifiable legislation. Thompson-Hickson explain why an effective democratic state must avoid "narrow, short-sighted", rational appearing concessions to a sequence of aggressors. This successful avoidance requires that military leaders have emergency, and only emergency, taxation power to thwart aggressors. Examples of temporary emergency taxation are "conscription, rationing, price controls, money creation" and other actions regarded usually as "inefficient" actions under a narrower focus of analysis. Still other surprising examples explained by Thompson and Hickson are the gold standard, the guild system, international trade barriers, and exchange controls. These all fly in the face of modern popularly espoused "appropriate" domestic and international policies. In short, the Thompson-Hickson interpretation of the rise of wealthy dominant nations does not rely on advice of superior intellectual advisers, but instead rests on the pragmatic, almost ad hoc, actions of democratic legislators. This implies that "superior" actions (arrogantly popularly labeled as "programs") in the wealthy dominant nations evolved through adaptive adjustments and natural selection.

            Thompson-Hickson thus provide a healthy antidote to intellectual arrogance. The reliance on a God -- or rationally designed -- path of events is replaced by a competitively evolving filter of pragmatic experimental events which is well in conformity to a modern evolutionary paradigm. And yet, quite unique to their process, ideas and intellectuals themselves evolve and, through their effects on vital institutions, play a critical role in the rise and fall of dominant states.

            Armen A. Alchian

PREFACE

            One of us started out his professional life as a libertarian, the other a Marxist. Soon thereafter, serious economic research taught each of us, as it did numerous other young economists, that practical solutions to real-world problems did not emerge from the engaging ideologies taught us by our activist economics teachers. Realistic transaction and protection costs, and a correspondingly complex array of unmistakable externalities, vitiated the libertarian conclusions of classical economists. And competition, whether economic or political, possessed none of the devastating inconsistencies charged to it by Marx and his intellectual descendants.

            But these straightforward escapes from ideology furnished us with no analogously constructive policy framework. Rather, we, again along with many other young economists, were cast adrift in a sea of perplexing analytical questions.

            Yet the ensuing swim-for-shore that preceded this writing, although lengthy in that it has been steadily proceeding for well over three decades now, has been remarkably easy. For the adventure has been accompanied by a growing realization of the ready solvability of many of the alleged imponderables raised by the initially right-minded critics of standard ideology. It now appears that these critical thinkers had been collectively exaggerating the difficulty of many of the theoretical problems that they had posed. These thinkers -- including several, more talented, would-be competitors in the supply of a new economic paradigm -- have been hierarchically organized into coordinated intellectual cliques so they could, and would, if they collectively found a particular class of logical and realistic solutions to be psychologically "unappealing", simply ignore it and continue on unperturbed. A likely reason for the collective ignoring of such solutions, as economic reasoning itself suggests, is that the material welfare of a group of specialized thinkers is founded upon their abilities to provide a long series of moderately useful, ideally demand-creating, future solutions. One-fell-swoop solutions, especially ideas whose content alone reduces the future demand for such thinkers, are simply unprofitable. The accepted leaders of a long-surviving group of critical-minded professionals therefore tend to psychologically regard such market-destroying theoretical solutions with detached amusement and to say that such solutions "cut the Gordian knot," even though the two ends of the rope are hanging free and there is no visible evidence of any such cut.

            We shall correspondingly begin by dismissing our priestly intellectual heritage and thereafter weave a long series of empirical observations into a sacrilegious set of theoretical propositions to create what we believe to be a logically consistent and uniquely defensible world-view and policy approach. While economists typically regard themselves as entertained by sacrilege, we would be surprised if the highly socially integrated intellectuals in the group were able to tolerate our deicidal heresies, no matter how logically our arguments hang together or how accurately they fit reality. We would like to be popular. It's just that we have found the truth, or at least a continuously logical and empirically disciplined approach to finding it, too socially important to make the appropriate sacrifices.

            Having just fired a round of buckshot into a roomful of well-protected kings, we had better produce a one hell of a good explanation.