To be published in PUBLIC CHOICE, 2004
Nietzschean development failures Arye L. Hillman Department of Economics, Bar-Ilan University, Ramat Gan, 52900 Israel Centre for Economic Policy Studies, London, U.K. CESifo, Munich, Germany
Abstract Government policies, and substantial external resources and technical assistance provided over the course of decades, have neither eliminated broad poverty nor resulted in equitable income distributions in the poorer countries of the world. This paper explains the development failures with reference to Nietzschean behavior where the strong act without ethical restraint and the rule of law does not protect the weak. While Nietzschean behavior violates principles of social justice, there are also inefficiencies. The Nietzschean strong who rule have no incentive to adopt efficiency-enhancing policies. Efficiency in a Nietzschean society is also greater, the higher the leisure preference of the weak and the less the weak are capable of producing. Labor productivity is low because the weak do not consistently work. These are the outcomes when the strong behave as roving bandits. When the strong behave as stationary bandits, efficiency is enhanced but income distribution can be expected to remain unequal. The Nietzschean perspective on development failure is compared with alternative explanations for the sustained plight of the poor in poor countries and the unequal distributions of income and wealth.
JEL Classification Numbers: I3, O1, H1 Keywords: Development failure, poverty, inequality, Nietzsche Email address:
[email protected]
Acknowledgments Sanjeev Gupta and Heinrich Ursprung provided helpful comments. I have also benefited from seminars at the International Monetary Fund, Kobe University, Ryukoku University in Kyoto, Nanyang University in Singapore, Tel-Aviv University, the University of Haifa, DIW Berlin, and Monash University. A preliminary version of this paper appeared as working paper WP/00/187 of the International Monetary Fund. The views expressed in this paper do not necessarily reflect in any way the positions of the International Monetary Fund or any other organization or institution.
1. Introduction Decades
after
independence
from
colonial
rule
transferred
responsibility for economic policy to indigenous governments, poverty has remained extensive in poor countries (see the International Monetary Fund, 1997; the World Bank, 2000, 2001). The poverty has persisted, although the World Bank, the International Monetary Fund, and other international agencies and donors have devoted vast resources and technical assistance to development efforts. The sustained poverty has been accompanied by the most unequal distributions of income and wealth (see Ke-young Chu, Hamid Davoodi, and Sanjeev Gupta, 2000). Two further observations can be added.
Labor productivity in the
poor countries of the world is low (see Robert Hall and Charles Jones, 1999). Also, governments in the poor countries have broadly not complied with the policy conditionality that has accompanied aid resources and technical assistance (see William Easterly, 2001). Low productivity and poverty in poor countries can be due to influences such as health problems of the population, natural disasters, or climate-related problems including drought.
However, these influences do
not explain systematic long-term absence of growth and sustained poverty and income inequality. Natural resources also affect incomes. Countries are unequally endowed with natural resources.
However, there are oil-rich
countries where the large majority of the population is poor and the distribution of income and wealth is most uneven. There are also countries with limited natural resources that began with low incomes in the 1950s and achieved economic development and high incomes. Since climate and natural resources do not explain systematic development failure, we can direct our attention to government. There have been limited instances of democracy in the poor countries of the world. With some few exceptions, government has been autocratic. However, democracy has not been a prerequisite for successful economic development.
The
experiences of Singapore and Hong-Kong defy a claim that democracy is
2
necessary if development failure to be avoided; China has also achieved sustained economic growth without democracy. With democracy or the form of government not a necessary determinant of development success, we are left to consider the possibility that it is attributes or the nature of the persons who govern that underlies development failure or success. Social mobility in poor countries has been low; William Easterly (2001) observes correspondingly, in summarizing empirical studies, that the returns to education in poor countries have been low. This paper describes consequences when social mobility is zero and the persons who govern have no regard for ethical behavior and no regard for the rule of law. Behavior is consequently based on principles associated with the philosopher Friedrich Nietzsche (see, for example, Nietzsche, 1997). Nietzsche described the strong as imposing their will on the weak without inhibitions of conscience or ethics, and the weak as having no means of resistance. For example, from a Nietzschean perspective, if a hawk wishes to eat a lamb, and if the hawk has the means to prey upon the lamb, this is what the hawk will naturally do. The lambs can be predicted, according to a Nietzschean view, to intellectualize their plight and to develop a moral philosophy that describes lambs as good and hawks are bad. For lambs do not kill and eat hawks. The behavior of the hawk is however for Nietzsche natural and is predictable because hawks are strong and lambs are weak. The hawk is acting out its role in the way that nature allows. The lambs may plead for ethical behavior and may make appeals to conscience; a Nietzschean perspective predicts this response as the sole defense available to the weak against the natural superiority of the strong. Nietzschean behavior contradicts ethical principles set out some millennia ago, in particular that obstacles should not be placed in the path of the blind (meaning not only the physically blind), that strangers should not be oppressed (the stranger being the weakest in a society in not having ties of family or friends), and that basic rights of every man and woman to life, personal freedom, and possession of the fruits of one’s labor should be respected. By any conception of social justice (on different conceptions, see Charles Rowley 1993), Nietzschean behavior is unjust.
3
I shall show,
however, how Nietzschean behavior is the source of inefficiencies that impede economic development. A first impediment to development is that the strong, as ruling elites, have no incentive to adopt efficiency-enhancing policies.
Easterly (2001)
documents the many instances of adjustment loans and debt forgiveness that resulted in no adjustment and no improvement in the plight of the poor (nor in long-term reduction of debt, which increased to be forgiven again). A second impediment to development is that the weak (or poor) behave in ways that make them appear lazy and that result in low productivity (not only labor productivity is low in poor countries; Devarajan, Easterly, and Pack, 2001, report, for example, that they could find no evidence that investment is productive in Africa). Viewing the poor as lazy would, however, be misleading, and unfair, since the behavior of the weak or poor derives from the Nietzschean behavior of the strong. An inversion of usual productive relationships also takes place: higher leisure preference and lower productive capability of the weak increase efficiency (where efficiency is defined as expected relative to potential welfare). The Nietzschean strong can behave as either roving or stationary bandits (for this terminology, see Mancur Olson, 2000).
Roving-bandit
behavior takes the form of a single-encounter game, with the strong having no regard for the future.
Stationary-bandit behavior takes place in the
context of a repeated game. Applying the folk theorem of repeated games, a sufficiently low discount rate of the strong sustains a self-enforcing contract where outcomes are more efficient than in the single-encounter game where the strong act as roving bandits. Disparate bargaining power of the strong suggests, however, that the distribution of the efficiency gains from stationary-bandit behavior will sustain unequal distributions of income or wealth.
The distribution of income or wealth is therefore unequal as the
consequence of predatory behavior, whether the strong behave as roving or stationary bandits. A Nietzschean perspective on development failure is related to corruption and rent seeking through the focus on how persons in
4
government behave.
Corruption has been shown to be associated with
increased military and project spending in poor countries at the expense of public spending on education and health because of better opportunities for bribes in the course of government procurement than spending on schools, teachers, and medical facilities (see Paolo Mauro 1998; Daniel Treisman 2000; Sanjeev Gupta, Luiz de Mello and Raju Sharan 2001). Rent seeking impedes economic development by attracting initiative and time away from productive to distributional activity (see Karl Pedersen, 1997; Eddie Wing Yin Tang, 1998; Hillman and Heinrich Ursprung, 2000).
Corruption and rent
seeking in general occur furtively, or surreptitiously.
In a Nietzschean
society, however, the strong have no need to hide their behavior.
The
Nietzschean strong are not subject to legal penalties or to social or electoral disapproval.
Success in predation might be a visibly displayed source of
personal pride (see James Cassing, 2000; Charles Rowley, 2000).
With
neither legal nor ethical restraint, Nietzschean behavior is inhibited by neither guilt (before the act) nor shame (if found out after the act). In the absence of ethical norms and without the rule of law, corruption in government is simply not defined. We might also ask whether “government” is at all a concept we wish to apply in a Nietzschean society.
Nietzschean behavior can rather be
interpreted as anarchy where the weak have no protection (including through conscience) from the predatory strong.
Correspondingly, we may
not wish to use the term “society” when describing Nietzschean relationships between strong and weak. Nonetheless, the development failures have taken place
in
sovereign
states
with
recognized
governments
that
have
representatives at the United Nations and send delegates to international conferences on global issues.
Because Nietzschean governments exercise
5
recognized sovereign power, we are obliged to refer to the Nietzschean strong as rulers rather than as predators in anarchy.1 The paper proceeds as follows. encounter game.
Section 2 sets out the single-
Section 3 considers extensions, with observations about
endogenous effort and rewards, risk aversion, cultural transmission of values, and incentives for deception. Section 4 describes the repeated game that is consistent with stationary-bandit behavior.
Section 5 relates a
parable and section 6 compares Nietzschean with other explanations for development failure.
Section 7 contemplates means of escape from
Nietzschean outcomes.
2. A Nietzschean society The scenario that I shall use to describe the paradigm of strong and weak envisages an agricultural society where all people in the population have the option of using all available productive time to work in their fields. I shall refer to the fields of the weak, even though property rights of the weak are not recognized by the strong. Inefficiency can arise from two sources. The strong might decide to come to the fields of the weak to appropriate output that the weak have produced, in which case the efficiency loss is the output that the strong could have produced had resources (time in particular) not been used in setting out to appropriate. The second source of efficiency loss is that the
1
On the strong viewed as predators in anarchy, see Hillman, 2003, chapter 1. Herschel Grossman and Minseong Kim (1995) and Jack Hirshleifer (1995), among others, have investigated predatory behavior without the rule of law, and have addressed questions of defense of property rights and how property rights form. Hirshleifer (1991) has also described conditions where the weak triumph over the strong – but then the weak become the strong.
6
weak may choose not to work, or in particular not to work beyond subsistence needs. I shall describe the strong as not inordinately cruel and therefore as always leaving the weak with subsistence output so that the weak do not starve; the strong are described as in this way even when they behave as roving bandits. If the weak are left with subsistence output, they can live and also thereby enjoy leisure even if their above-subsistence output is appropriated by the strong, or if alternatively they choose not to work above subsistence needs and to enjoy leisure. There is no social mobility. The division between weak and strong is predetermined, by tribal designation or extended-family affiliations that designate ruling elites, or a caste system (as for example in India; see Oliver Mendelsohn and Marika Vicziany, 1998). The strong as a group make collective decisions whether or not to seek to appropriate from the weak or else the ruler makes the decision by which the adherents or group members abide.
The weak make collective
decisions at the village level whether or not to work their fields. Decisions are made simultaneously, or under uncertainty. The weak when deciding whether to work do not know whether the strong will arrive to appropriate their output. The strong when deciding whether to set out to appropriate do not know whether they will arrive at the fields of the weak to find that the weak have worked or nor worked. That is, the strong do not know whether there will be output to appropriate. These circumstances give rise to the game set out in table 1 where decisions are made with complete information and common knowledge. R is the utility (or output) of the strong when the strong use all their resources productively. The utility (or output) of the weak when the weak use all their resources productively is r.
Social welfare as measured by a Benthamite
function is maximized at W=(R+r) when all resources in the society are used productively. There are, in general, further possibilities for increases in welfare from gains from trade through comparative advantage. A single-good model does
7
not allow a consideration of the gains from trade. In principle, the weak and the strong could be producing different goods that they could trade, although markets would of course require the rule of law and recognized property rights (see Hillman,(2003, chapter 1). A fixed cost V is incurred by the strong if the strong choose to set out to appropriate from the weak. The cost V is incurred before the strong know whether the weak have decided to work.
If the strong have set out to
appropriate and find that the weak have worked, the strong leave the weak with subsistence output a. The weak are aware that the strong may arrive at their fields to take their output, and can choose to work to produce r or not to produce beyond subsistence output that provides the utility a, and also then to have leisure that provides additional utility h. Therefore, when the weak choose not to work beyond subsistence, they have utility b=(a+h). The weak benefit more from working than not working, provided that the strong do not arrive to appropriate their output. That is, r>b=(a+h). The utility of the strong if the weak have worked and the strong appropriate is A=(R-V)+(r-a) where A exceeds R. That is, for an attempt at appropriation to be worthwhile, the cost of appropriation V has to be sufficiently low, with VR>B. The best outcome A for the strong is obtained when they appropriate and the weak have decided to work. The worst outcome B is when the strong have expended resources for appropriation but the weak have decided not to work. The strong achieve R unilaterally if they choose not to commit resources to appropriation.
Table 1: The Nietzschean game The strong attempt to appropriate
The strong uses all their resources productively
The weak are productive
a,A
r,R
The weak do not produce beyond subsistence
b,B
b,R
Utility of the weak is ranked r>b>a.
The weak obtain their best
outcome r when they work and keep their output because the strong have not expended resources on appropriation. Their worst outcome a is obtained when they work and their above-subsistence output is appropriated.
The
weak can unilaterally achieve b by choosing not to produce above subsistence. There is no Nash equilibrium in pure strategies. That is, in any of the outcomes in table 1, either the strong or the weak can do better by changing their decision.
(r, R) is not a Nash equilibrium because A>R (if the weak
work, the strong can do better gain by taking the output of the weak). (a,A) is not a Nash equilibrium because b>a (if the strong attempt to appropriate, the weak are better off not producing beyond subsistence).
(b,B) is not a
Nash equilibrium because R>B (if the weak do not work, the strong are better off not using resources in appropriation).
(b,R) is not a Nash
equilibrium because r>b (if the strong do not seek to appropriate, the weak are better off working).
9
To characterize the mixed strategy equilibrium, we define Pw as the probability that the weak work.
The strong are indifferent between their
alternative decisions when PwA+(1-Pw)B=R.
Hence in the mixed-strategy
equilibrium
Pw* =
(1)
R−B V . = A− B r −a
In (1), as A approaches R in value, the gain to the strong from successful appropriation diminishes and a decision by the strong to assign resources to appropriation becomes less worthwhile, so the probability that the weak work increases.
Or the probability that the weak work declines with the
surplus (r-a) that the weak are capable of producing over their subsistence needs. That is, the more potentially productive are the weak, the less likely they are to work.
We also see in (1) that, as the cost of appropriation V
increases, so does the probability that the weak work. With Ps is the probability that the strong appropriate, the weak are indifferent between working and not working when Psa+(1-Ps)r=b, which implies the probability in equilibrium that the strong commit resources to appropriation (2)
Ps* =
r −b h = 1− . r−a r−a
Hence, as the utility of the weak from leisure h increases, the probability that the strong use all their resources productively and do not attempt to appropriate increases.2
As the surplus (r-a) that the weak are capable of
producing increases, the probability that the strong will choose to set out to
2
Note that by the definition of the value of a probability h is bounded not to exceed (r-a).
10
appropriate increases; since the surplus (r-a) is the prospective gain that attracts the predatory intent of the strong. Thus the strong are more likely to use resources in appropriation, the greater the productive capabilities of the weak; and, as we have observed, the weak are less likely to work, the greater their productive capabilities. The expected utility of the weak in the Nietzschean equilibrium is (3)
EU w = b = ( a + h )
and the equilibrium expected utility of the strong is (4)
EU s = R .
Therefore total expected welfare in the Nietzschean equilibrium is (b+R).3 Since maximal total welfare where all resources are used productively is (r+R), we can define the efficiency of the Nietzschean society as (5)
E=
a+h+R r+R
where we have substituted b=(a+h).
3
(3) and (4) follow from the properties of the mixed-strategy equilibrium. To confirm through a more extended computation using joint probabilities,
EU w = Pw* Ps* a + Pw* ( 1 − Ps* )r + ( 1 − Pw* )Ps* b + ( 1 − Pw* )( 1 − Ps* )b = b
EU s = Pw* Ps* A + Pw* ( 1 − Ps* )R + ( 1 − Pw* )Ps* B + ( 1 − Pw* )( 1 − Ps* )R = R .
11
The indifference of the strong to efficiency-enhancing policies Since the strong receive R in both the Nietzschean equilibrium and in the efficient state of society, the entire burden of Nietzschean inefficiency falls on the weak. It follows that: In a Nietzschean society, the strong lack incentives to implement efficiencyenhancing policies. Inefficiency borne by the strong could not be part of an equilibrium outcome, since the strong would not impose inefficiencies for which they incur the cost. The strong, therefore, do not gain from policies (in particular the rule of law) that increase efficiency beyond the Nietzschean outcome.
In a
Nietzschean society, a policy dialogue with the strong aimed at implementing efficiency-enhancing policies cannot therefore be expected to result in the strong honoring policy reform commitments.
Laziness or high-leisure preference by the weak Because they do not work consistently, the weak could give the appearance of being lazy. However, the weak would work consistently were it not for the unethical behavior of the strong in seeking to appropriate their output (and sometimes succeeding). We can also consider the consequences of higher leisure preference by the weak. We see from (5) that: In the Nietzschean society, higher leisure preference by the weak makes the society more efficient (as defined by the relation between expected and maximal welfare). Also, we see from (1) that, since a=(b-h), the more the weak enjoy leisure, the smaller is the likelihood they will have chosen to be productive, and from (2) the more the weak enjoy leisure, lower the probability that the strong will use resources in appropriation.
12
Alternative circumstances involving laziness or high-leisure preference are described in James Buchanan’s (1975) Samaritan’s dilemma.
In the
scenario described by Buchanan, a “parasite” exploits the benevolence of a donor and does not work in the Nash equilibrium.
In the Nietzschean
equilibrium the weak do not work consistently because they internalize (or fear) exploitation by the strong.
The social efficiency of low productive capabilities of the weak With the rule of law is present or in an ethical society, increased productive capabilities by any part of the population in general increase a society’s welfare.4 Correspondingly, the greater is the productive capability r of the weak, the greater is maximal potential welfare (r+R).
We have
observed that in a Nietzschean society increased productive capabilities of the weak diminish the probability that the weak work and increase the probability that the strong appropriate. From (5) we conclude that: A Nietzschean society is more efficient when the weak are capable of producing less.
3. Extensions We can now consider extensions. endogenous.
Effort and rewards can be
There might be risk aversion.
Cultural transmission of
preferences might take place. There might be asymmetric information and opportunities for deception.
13
Effort and endogenous rewards The rewards in table 1 are given. The rewards become endogenous when the allocation of effort is discretionary. Suppose that the weak have effort capability ew that can be used as effort ewr that increases output r and effort ewb that increases utility from leisure b, in both cases with diminishing returns.
That is, ew=ewr+ewb and where r=r(ewr) and b=b(ewr) are concave
functions. Suppose that the strong similarly have effort capability eS that can be used to increase R or to reduce the cost V of appropriating output, with es=esR+esV and where R=R(esR) and V=V(esV) are concave functions. Since EUw=b, the weak increase their expected utility by increasing b; and since EUs=R, the strong increase their expected utility by increasing R. We can therefore conclude: When effort can be discretionally allocated, the strong direct all effort at increasing utility from being productive and the weak direct all effort at increasing the utility from enjoying leisure.
Risk aversion Risk aversion does not affect the assignment of effort. For the weak, the risk-free return is the utility from leisure while being productive exposes the weak to risk.
For the strong, the risk-free return is the benefit from
being productive while there is risk in choosing to assign resources to appropriation. With risk aversion changing allocations of effort toward the
4
The counterexample requires circumstances where the shadow price of a factor of production is negative. This can arise, for example, as the consequence of protectionist policies.
14
risk-free activity, the weak would seek to increase effort directed at increasing utility from leisure and the strong would seek to increase effort directed at increasing the utility from productive activity. However, without risk aversion, the weak and the strong already assign all effort respectively to increasing utility from leisure and from productive activity. Risk aversion reinforces but does not affect the effort allocations.
Cultural transmission Models of cultural transmission show how altruistic parents transmit preferences to children. Transition probabilities for preferences of children are specified as the combination of endogenous efforts of parents to influence children and exogenous influences on the behavior of children (see for
example
Alberto
Bisin
and
Thierry
Verdier,
2001).
Transition
probabilities specify the likelihoods that children of the weak will be weak or strong, and similarly the likelihoods that the children of the strong will be strong or weak. If we denote by ρij the probability that children of parents with attribute i will have attribute j, for the children of the weak (ρww+ ρws)=1 and for the children of the strong (ρss+ ρsw)=1.
Parents subject to these
probabilities maximize the expected utilities of their children, with the transition probabilities providing the weights that the parents place on cultural transmission of preferences to children. In a Nietzschean society, social mobility is zero. Parents of the weak therefore place positive weight only on transmission of preferences that emphasize benefit from utility from leisure, and parents of the strong place positive weight only on transmission of preferences that emphasize utility from through material reward. Therefore: In a Nietzschean society, altruistic parents of the strong shape the preferences of their children to be productive and altruistic parents of the weak shape the preferences of their children to derive utility from leisure.
15
Deception Another step beyond the model of section 2 considers the possibility of deception by the weak.
That is, we could recast the model in terms of
asymmetric information where only the weak know their own true benefit from leisure and their own true productive capability. The weak then have an incentive to attempt to deceive the strong so that the strong will believe that the weak enjoy leisure more than they do, and also that the weak if they work are less productive than they are.
The deception would entail overt
displays of high leisure preference by the weak and would require the weak to have means of hiding true output produced.
4. Roving and stationary bandit behavior The outcomes observed in section 2 change when the interaction between the strong and the weak is a repeated game and the strong have sufficiently low discount rates or long time horizons.
In the single
encounter, the reservation utility or minimax values are b for the weak and R for the strong. By the folk theorem of repeated games, there exist infinitely many equilibria where the weak are provided with higher benefit than b and the strong are provided with higher benefit than R. That is, an incentive is provided for the weak to work consistently and produce r if the strong leave the weak with more than b in each period so that expected utility of the weak exceeds their reservation utility in the single-encounter game. The repeated game is consistent with behavior of the strong as stationary bandits and the single-encounter game with behavior of the strong as roving bandits. The distribution of the surplus from stationary-bandit behavior of the repeated game provides the incentive for a mutually beneficial self-enforcing contract between strong and weak. The self-enforcing contract eliminates the inefficiency of the weak choosing not consistently to work in the roving-bandit mixed-strategy equilibrium.
However, with the cost of appropriation continuing to be
incurred (the strong still have to come to the fields of the weak to
16
appropriate the output), this source of inefficiency remains. With the weak consistently working, the amount available for distribution between strong and weak in any period (there is one encounter per period) is (r+R) if the strong do not appropriate and (r+R-V) if the strong appropriate in that period. From these amounts available for distribution, the weak can be promised (b+β) on average, where β>0 is the gain to the weak from stationary-bandit behavior by the strong. delivered in different ways.
The additional gain β can be
The strong can announce that they will
appropriate with lower probability than indicated by expression (2), or the strong can announce they will take less than (r-a) whenever they have come to appropriate and have found that the weak have worked. Or there can be combinations of such announcements. Let us consider only outcomes when the same behavior is replicated in each period in the repeated game.5 The weak receive (b+β). The strong receive (R+ µ), where µ is the additional benefit to the strong from stationary bandit behavior. Denoting the discount rate of the strong by i, the present value of the return to the strong from stationary-bandit behavior is (6)
(R+µ) . i
5
This avoids complications in specifying the nature of the costs of appropriation in the repeated game. In the single-encounter game, V is a fixed cost of attempted appropriation incurred whether appropriation is successful or not (i.e., incurred whether or not the weak had worked above subsistence and therefore independently of whether there was output to appropriate). We could have specified different costs of appropriation depending on whether there has been output produced to appropriate. That is, additional variable costs could be present that depend on the output appropriated. In the repeated game, the amount appropriated can vary, and fixed costs of appropriation can be combined with variable costs. Constant per unit costs of appropriation imply that the strong (and the weak) are indifferent between outcomes in the repeated game where appropriation takes place each period and where the same amount of appropriation takes place through a lower incidence of appropriation than the single-game equilibrium probability of appropriation.
17
Alternatively, suppose the weak work and the strong appropriate in the first period.
In response to the appropriation, the weak revert to the
mixed strategy and the strong receive their reservation return R in all subsequent periods.
The present value to the strong from roving-bandit
behavior is then
R +( A− R ). i
(7)
The strong thus choose stationary bandit behavior if their discount rate is sufficiently low to satisfy
i
