Book Reviews

Development's Discontents

How to explain the link between economics and democracyand how not to.

By James K. Galbraith

Tagged DemocracyDevelopment

Economic Origins of Dictatorship and Democracy
By Daron Acemoglu and James A. Robinson • Cambridge University Press • 2006 • 416
pages • $35

A Free Nation Deep in Debt: The Financial Roots of Democracy By James MacDonald • Princeton University Press • 2006 • 564
pages • $19.95

From where does democracy come? Is rule “by the people, for the people” a telos–an ethical endpoint–as the great American civic faith would have us believe? Is it the most effective way to solve social problems–as John Dewey and the pragmatists argued? Or is it merely the worst system except for all the others, as Winston Churchill dismissively quipped?

These two important books–Economic Origins of Dictatorship and Democracy by Daron Acemoglu and James Robinson and A Free Nation Deep in Debt
by James MacDonald–take an economic view, well-suited to a material
age. They locate the origins of democracy not in ethics or social
engineering, but as a side effect of the struggle for goods and
services, wealth and market power. And yet, that is their only
resemblance. They refer to few of the same facts and none of the same
literature. Their uses of the term “economic” are totally dissimilar,
and in that dissimilarity they reveal as much about the great divides
within economics as they do about the origins and fate of democracy.

The contrast is, first of all, one of substance. One book associates
democracy with the material temptations of populism: Democracy arises
because it redistributes income to the masses. The other sees the
democratic advantage in evolutionary and comparative perspective:
Democracies survive and thrive because they beat out rival systems,
most especially on the battlefield, history’s ultimate test of material

But behind the competing theses lies a deeper conflict of form. One
book reflects the dominant spiritual tendencies of political science
and neoclassical economics, rooted in methodological individualism and
a presumption that institutions efficiently deliver what individuals
want. The argument proceeds mathematically, by axiom and proof. Though
the reference is broadly to democracy allied with capitalism, there is
no discussion of credit, money, banking, financial markets, or other
basic capitalist institutions. The approach is timeless and at best
decorated here and there by corroborating fact.

The other book is a masterpiece of historical narrative, founded on
an immense trove of numerical detail, drawn from the records of public
finance and credit markets over millennia. Yet it is not the sort of
“measurement without theory” that might be dismissed as redolent of the
German Historical School. It is, rather, narrative in service of an
idea. The contest between these works is thus as much a contest between
the hypothetico-deductive and the evolutionary method, as it is between
a “real” and a “monetary” view of economics, and as much between a
theory of distribution and a theory focused on efficiency and growth.
In short, they offer competing models for economics and political
science. And the fact that one exemplifies mainstream practice in our
great universities–while the other is product of an unknown
outsider–casts a cruel light on the most favored patterns of thought in
the contemporary ivory tower. And it makes one nostalgic for the days
when those in the social sciences were interested in society–its
progress and its prospects.

For Acemoglu and Robinson, an MIT economist and a Harvard political
scientist, respectively, the word “economic” signifies the
neo-Benthamite doctrine of “rational choice”–a theory of behavior
rooted in the “well-defined preferences” of individuals over “outcomes
or the consequences of their actions.” To them, democracy is a process,
not an end, and the preference for it is utilitarian and not a matter
of values. Acemoglu and Robinson ask that we consider a group of
individuals for whom democracy and non-democracy have the same
consequences in all spheres, except that democracy generates more
income for them; they naturally prefer more income to less. Therefore,
we expect these individuals to prefer democracy to nondemocracy.

What does this grubby instrumentalism have to do with political
systems? Acemoglu and Robinson do not argue that democracies are more
efficient, yielding more income for everyone. Their argument is about
distribution. But economics argues that distribution is mediated mainly
by markets, not by governments. (The phenomenon of
“rent-seeking”–mining government for favors–is an exception, but it is
not specific to democracy.) So why should any group systematically
prefer democracy for economic reasons?

For an explanation, Acemoglu and Robinson invoke the familiar
mechanics of class conflict. All societies are divided into “elites”
and “citizens.” “Typically,” Acemoglu and Robinson write, “there is
political conflict between the elites and the citizens.” The original
version of the thought–”The history of all hitherto existing societies
is the history of class struggles”–is not quoted, but the spirit is
definitely kindred. Yet unlike Marx, Acemoglu and Robinson argue that
the outcome of struggle is generally not revolution leading to
proletarian dictatorship, but democracy. Wanting money, the citizens
press for the vote. And, though revolutions obviously occur sometimes,
democracy is simply a rational alternative: less costly to the elites,
equally beneficial to the masses. In short, democracy arises because
elites choose to concede it, rather than face the prospect of being
disposed of unpleasantly. A few major social parameters, especially the
previously existing degree of inequality, determine these relative
benefits and costs. Very roughly, high degrees of inequality deepen
class conflict and the resistance of elites to democracy, while very
low degrees of inequality reduce the gains citizens expect from
democratization. Somewhere in between there is a sweet spot, and there
democracies grow.

This theory of causes implies a transition to democracy, which means
that we need some way to divide the world between democracies and
non-democracies. For Acemoglu and Robinson, this distinction is simply
about suffrage. Democracy exists when “the people” vote for their
government, in elections that incumbents occasionally lose. At that
point, one is led to suppose that class conflict ends and history
stops. Of course, this is a simplification. In real life, democracy is
not an end-state but an ideal type. There are no countries where
“everyone has the vote,” and there is no hard-and-fast boundary between
democracy and non-democracy. One group gains the franchise, then
another, then another still. Class struggle goes on, and the history of
democracy is a struggle toward democracy, a struggled to advance by

Four cases illustrate their argument: Britain, Argentina, Singapore,
and South Africa. In nineteenth-century Britain, Acemoglu and Robinson
argue, democracy consolidated because the class differences were
relatively small (try telling that to Dickens), and the elites simply
decided to accept the citizens’ policy preferences. In Argentina,
inequality was higher and the costs of repression lower, so that
democracy emerged but failed to consolidate: Cycles of democratization
and repression result. In Singapore, low inequality and a low cost of
repression preclude democracy: Rational citizens perceive that the
struggle is not worth the trouble. In South Africa, finally, the
authors argue that democratization occurred because the country became
more egalitarian after the 1970s, lowering the cost to the white elites
of conceding the vote to nonwhites.

This model implies and requires certain relationships in the data.
British inequality in 1832 or 1928 must have been lower than in 1970s
Argentina. Singapore today must be more egalitarian than Britain today.
And South African inequality must have declined before 1994. Yet
Acemoglu and Robinson cite no sources for these assertions of fact. And
it turns out that the World Bank data set they do cite on other matters
gives no support to them. That data set contains no “high quality”
points for Argentina at all and none for Britain before 1950. It
reports Singaporean inequality today to be substantially higher than
British inequality today. South African inequality, among the world’s
most prevalent, is given only for 1993 and 1994, giving no basis for
belief in a decline in the previous 20 years.

Acemoglu and Robinson’s theory also runs afoul of many cases they do
not discuss. For example, India is a highly unequal yet stable
democracy, for which no place exists in their model. Scandinavia,
barely mentioned here, is more egalitarian than Britain (or Singapore),
yet stably democratic. The collapse of communism in Eastern Europe is
another problem, as the low inequality of those countries should have
repressed the desire for democracy, but obviously it didn’t.

Yes, sometimes the initiation of elections can be an elite
concession to economic pressure from below. But a general theory of
democracy requires more than that. It requires, especially, an account
capable of explaining the grades and qualities of democracy, its ebb
and flow over time, and its sometimes genuine and sometimes superficial
nature. This Acemoglu and Robinson do not provide. Although they
assemble facts prodigiously, one must unpleasantly conclude that when
it comes to choosing the crucial ones, they have cherry-picked and also
sometimes plucked “data” from thin air, in the service of selling an
idea that is not so much wrong as it is far too simple. Acemoglu and
Robinson’s single-minded dedication to their idea is manifest in the
last two-thirds of this book, which are given over to game-theoretic
models, presented in mathematical form. The models are of rational
social choice–the decision, by “elites” and “citizens,” between
dictatorship” and “democracy.” They are statements of pure theory;
there is no further effort at evaluation, let alone critique. A typical
example occurs on page 232:

Work of this kind raises grave questions. It is not so much
incomprehensible as pointless. It actually isn’t incomprehensible, if
you work hard enough, but the symbols are empty, and the description is
not of a real society, but of an institutional vacuum, uninhabited by
actual human beings, untracked by actual data. No measurement will ever
test the theory. Words with real meaning, like “revolution,” are
conscripted as names for variables. The adjoining algebra serves
heavily to intimidate and does very little to persuade. The
presentation descends to parodies of jargon, enlivened by the absurd
interjection of words like “clearly.”

As an empirical study, this book illustrates perfectly the decline
of discourse brought on by the fetishism of formulae and the neglect of
rigor where it matters, in the pursuit of evidence to support, refute,
or refine what is otherwise little more than a conjecture. And yet, Economic Origins of Dictatorship and Democracy
will be heavily cited, lavishly praised, and assigned to advanced
seminars in the better graduate schools. Too bad. For it isn’t about
democracy. It’s about a cardboard caricature, the existence or absence
of certain rituals, which by no means assure that the citizens rule the
state. In sketching their caricature, Acemoglu and Robinson strip the
democratic ideal of substantial and also of ethical content. By
treating the democratic impulse as a pure exercise in money-grubbing,
they feed the contempt for democracy already characteristic of elite
circles–the rational member of Acemoglu and Robinson’s “elite” is, in
other words, a fascist. Indeed, if Acemoglu and Robinson’s democracy is
the only type on offer, there is little reason to support it–unless one
belongs to a transfer-receiving group.

Is there an alternative? If so, what would it look like? It would
feature quantitative precision, married to knowledge of history,
command of evidence, narrative skill, and to a fresh and important
idea. Beyond this, it would give new insight into the success of
democratic systems and also into the reasons they sometimes decay. As a
bonus, it might help those of us predisposed to favor democracy on
ethical grounds to understand that our sentiments might have a material
foundation, and therefore the reasons for the loyalty we instinctively
feel. It would, in other words, have many of the properties found in
James MacDonald’s A Free Nation Deep in Debt.

This book begins with Moses, ends with World War II, and covers just
about every important development in public finance in between. Yet,
for all of its historical sweep, MacDonald offers a simple, stunning
thesis: Democracy arises from public debt.

For MacDonald, a British former investment banker, there is no
distinction between “citizens” and “elites.” The citizens are the
elite. To be a citizen in society is to be a free member of it; those
who are not citizens are slaves or little better than slaves. Moreover,
the progress of democracy is the expansion of the franchise, a word
with two meanings: its present one of the right to vote and an ancient
one meaning freedom from direct taxation. In turn, public debt is the
hammer that knocks down the walls restricting citizenship, expanding
democracy by degrees. Thus the institutions of finance, missing from
Acemoglu and Robinson’s economics, suddenly take on the pivotal role.
As MacDonald puts it:

Democracy (even in its most partial and imperfect form) is
a system in which the citizens control the state. As long as democratic
states borrow from their own citizens, their good credit is simply a
reflection of the virtual identity of borrower and lender.


It’s a simple but compelling argument. States exist to make war;
those who win survive. Public credit is a powerful weapon; states that
can borrow win wars. And so even narrow democracies, rooted in
parliaments going back to the Middle Ages, have an evolutionary
advantage over absolute monarchies, for the king’s credit is always

MacDonald pursues this story from Athens, where citizens would
sacrifice their fortunes to the armies and navies when required,
through the republics of Venice, Florence, and Genoa, whose
citizen-creditors developed the first full-fledged public financial
systems, and onward to England, France, and Spain in the age of
conquest. He contrasts the strength of Anglo-Dutch finance with the
repeated bankruptcies of Habsburgs and Bourbons–state finance by
calculated confiscation, compounded with a privatized revenue system
that deprived the crown of revenue while creating a hated class of tax
farmers. It is no coincidence that Britain slowly became democratic,
while revolution followed the French default of 1788.

Across the Atlantic, MacDonald traces the maturation of American
public credit in the Revolutionary and Civil Wars, as well as the
struggles between soft and hard money in the years following. A
resolute member of the banker class, he argues powerfully in favor of
Ulysses S. Grant’s financial policy, for federal interest costs fell in
1869, when the United States promised to redeem its debts in coin, and
again with the Resumption Act of 1875.

Democratic finance differs from totalitarian not because it is easy,
but because it is open. Holding the liabilities of the state directly,
citizen-creditors understand that they form an essential part of
private financial wealth. They take a direct interest in their
government and its financial affairs (even though, as MacDonald
shrewdly notes, the exact extent of public debt may be concealed from
outside eyes). In totalitarian systems, banks and other buffer
institutions handle state finance–or foreigners do. Accordingly,
democratic systems understand the value of maintaining their credit;
despotisms do not.

Mass democracy emerged following World War I precisely because this
was the first war to be financed almost fully by the direct sale of
government bonds to the public. All the Great War combatants sold bonds
with zeal, and at war’s end all (except bankrupt and revolutionary
Russia) found themselves in debt to nearly every household in their
lands. Universal suffrage had to follow; you cannot ignore your
bankers, even when there are millions of them. World War II repeated
and deepened the experience, and in the aftermath popular democracy
reached its zenith throughout the West.

A beauty of MacDonald’s idea is that it can be tested against
situations he doesn’t discuss. Thus the democratic decolonization of
India fits: It occurred after India had become a large war-time
creditor of Britain. And the struggle for democracy in Latin America is
complicated by foreign debt, easily analyzed as an external electorate
of enormous power–one in obvious economic conflict with the voters who,
at best, only hold the internal debt. The communists of China and Cuba
maintain their insular systems because they are financially autarkic.
Meanwhile, in democratic Venezuela, the rise and survival of Hugo
Chávez owes everything to the singular financial autonomy conveyed by

Finally, MacDonald’s financial perspective helps explain the
relationship between democracy and economic development. The most
democratic states are not only powerful; they are rich. They are richer
than the monarchies they succeeded and also than the communist states
with whom for much of the twentieth century they competed. Why? Surely
the simplest answer lies in their ability and willingness to mobilize
public debt for development as well as for war. Democracies yield
higher incomes not because of vulgar redistribution, which cannot
distinguish them from communism, but because they alone can master the
great Keynesian financial tools required for the achievement of full
employment and national construction on the grand scale.

Given the simplicity and power of this argument, one reads the
epilogue of this great book with surprise and sorrow. In MacDonald’s
view, it’s all over. In the nuclear age, deficits and bond drives on
the world-war scale are history, and the American citizenry has lost
its pride of place as creditor of the American state. Today, financial
intermediaries hold about 37 percent of U.S. public debt; Japan and
China, along with other countries, now hold about 30 percent. The
proportion of U.S. debt owned directly by Americans has fallen to below
10 percent; in 1945 (when the debt was more than twice as large in
relation to GDP as now) citizen-creditors just about held it all. He
concludes that the link is broken and “for all practical purposes, the
venerable marriage between public credit and democratic government, so
vital a factor in the history of the world, has been dissolved.”

But there is another possible way to interpret this fact. If
MacDonald’s thesis is right, the disappearance of the citizen-creditor
forces a question. Can democracy survive when its financial roots have
been cut? The scale of public debt is not the issue, but its ownership
is. Can a country–whether the United States or any other–be truly
democratic if it is in hock to banks and foreigners? And this is only
the obverse of questions raised by our pathetic voter turnout, by the
vote suppression that regularly poisons our elections, by the judicial
coup d’état of December 2000, and by our regression toward a tax system
from which the state’s main creditors are exempt, leaving the burden to
fall heavily on all who do not or cannot vote–exactly those who
comprise our passive and disregarded lower classes.To put it bluntly, are we still a democracy? And, if not, what would it take to bring democracy back?

Read more about DemocracyDevelopment

James K. Galbraith James K. Galbraith teaches at The University of Texas at Austin.

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