Introduction

The preceding chapter examined one important element in the breakdown of democracy and the rise of dictatorship – the possibility that democracy will become trapped in inaction. This chapter examines a second historically important element in the rise of many autocracies – ethnic conflict and nationalism. Again, the classic example is Nazi Germany, and again the analysis is conducted with special reference to it. Although the word is much bandied about, the concept of nationalism remains largely shrouded in mystery and it is little understood, especially from the point of view of rational choice. In this chapter I will therefore proceed step by step. I begin with an analysis of the economic value of ethnicity (explaining why people form ethnic groups), and I will then proceed from there to the connection between ethnicity and nationalism, and finally to that between nationalism and Fascism. I then try to analyze the origins of prejudice and hatred of other ethnic groups. Finally, I begin to address the most difficult question of all – how these attitudes could result in a willingness to take part in “crimes against humanity” or genocidal actions against minority ethnic groups – in this chapter, and to explore it further in the next one.

The next section of this chapter suggests that in both public and private life, one particularly cost–effective way to provide a foundation for exchange under many circumstances is to invest in ethnic networks or “ethnic capital.”

Sympathy for the dictator

The most obvious feature of dictatorship is that dictators typically have enormous power over their people. Yet there is one thing that even dictatorial powers cannot give them: the minds of their subjects. Dictators cannot – either by using force or the threat of force, or by promises even of vast sums of money or chunks of their empires (if any are available) – know whether the population genuinely worships them or worships them because they command such worship. The case of the Roman emperor Nero provides a good illustration. Of all of his accomplishments, Nero was most proud of his lyre playing and, while emperor, he often entered musical contests. The art scene in Rome did not satisfy him and he headed for Greece. According to the profile of him by Gaius Suetonius, in his celebrated The Twelve Caesars (1957):

Introduction

One of the most provocative and controversial contemporary studies of dictatorship was that of Jeane Kirkpatrick, in her book Dictatorship and Double Standards (1982). The essence of her argument, as already mentioned in Chapter 1, is that there are two kinds of dictatorships. The first type, commonly referred to as “totalitarian” dictatorship, is characterized by massive government intervention into the economic and social lives of the citizenry, an intervention motivated by Utopian goals of one kind or another and exemplified by Communist dictatorships, Nazi Germany, and possibly contemporary Iran. The second type is what Kirkpatrick, following Carl Friedrich and Zbigniew Brzezinski (1965), calls “traditional autocracies” and which I call “tinpot” dictatorships, ones in which the ruling government does not intervene very much into the life of the people, represses them only to the modest extent necessary to stay in office, and uses its rewards of monopoly of political power to maximize personal wealth or consumption. Examples include Anastasio Somoza of Nicaragua, the Shah of Iran, Ferdinand Marcos of the Philippines, and General Noriega of Panama. In short, in Kirkpatrick's model, the basic tool dictators use to remain in power is the instrument of repression, and tinpot and totalitarian dictatorships differ mainly in their level of repression.

Perhaps surprisingly, in view of the controversy generated by these ideas, very little effort has been made to answer the simple question: How much of the actual behavior of dictatorships can be explained with this type of model?

Introduction

The system of apartheid in South Africa has passed into history. But what was apartheid, exactly, as a political–economic system? Whose interests did it serve, and why was it abandoned? Perhaps surprisingly, there are no clear-cut, satisfactory answers to these questions. Moreover, there are a number of reasons why the Apartheid Laws are of general interest. First, they provide one of the few explicit examples of labormarket regulations which are usually only implicit but which are generally characteristic of many dictatorships. In particular, two of the hallmarks of apartheid regulation – job reservation (in which certain kinds of jobs were reserved for specific groups) and influx control (in which only black workers with a “pass” were allowed to work in the whitecontrolled manufacturing sector) – are widely, if more informally, practiced by nondemocratic regimes, and examination of their operation in the context of the apartheid system can be expected to yield insights into how they work in general.

Second, the Apartheid Laws provide a useful illustration and testing ground for the exploration of theories of economic exploitation, in which one group uses its political power over another to appropriate its earnings. It is a commonplace that this can be done through the government's tax and transfer system. What is striking about the apartheid system is how the Apartheid Laws of job reservation and influx control were used by whites to appropriate the earnings of blacks through the marketplace.

Introduction

Much of the world still lives, today, as always, under dictatorship. Yet we know very little about the behavior of these regimes. One reason for our ignorance is simply that dictatorships tend to be closed societies, and information on them is hard to obtain. Another reason is that they are typically feared and disliked, so that most research on them has focused on how they arise (with the view that once this is understood we can prevent further instances) and comparatively little work has been done trying to understand how these regimes actually function. Finally, when their behavior has been researched, the point of view taken has often been that they operate by repression and command. Policies are decided at the top – by the dictator, with the help of a small group of advisers – and then imposed on a hapless population. The population acquiesces either as a result of fear, on the one hand, or brainwashing, indoctrination, and thought control, on the other. However, the explanatory power of these concepts – their capacity to explain changes in the level of repression, for example, or to explain why regimes rise and fall – is not very large. In this study I have tried to understand and explain the working of dictatorship from a different point of view – namely, that of an economist.

Introduction

All the elements that affect the dictator's behavior are now in place. To begin with, we know some things about his or her personality. Such leaders tend to be paranoid, because they lack reliable information about what their people are really thinking about them. One of their chief concerns is staying in office, and to this end, they are engaged with more or less frequency (depending on the type of dictatorship) in buying loyalty and implementing repressive measures in order to do so. We know less about their subjects, but we do know that as long as they are at all numerous – and especially if they are unorganized – the benefits to each one of overthrowing the dictator will be small compared with the potential costs. This free-rider problem helps dictators immensely in the task of staying in office, but it doesn't solve it completely, and under the right circumstances they can be deposed, as dictators often are. This can happen in a number of ways:

1. by a cabal of associates, including those closest to the leader

2. through the loss of support of powerful bureaucracies, especially the army

3. by a revolt of the mob

4. through the intervention of foreign powers.

The behavior of a dictator's subjects was modeled in Chapter 3 as follows. Each subject faces a choice between supporting and opposing the regime.

Introduction

A specter haunts democracy. Many – if not most – of the citizens of democratic countries put great value on liberty and the capacity to develop as individuals, both of which are the hallmarks of democracy. However, these freedoms have a price, one that arises from the fact that when individuals are free to develop in different ways, they will tend to take different paths. Moreover, in open societies characterized by freedom of association, individuals are free to join or form into groups, groups are free to practice and to advocate their own beliefs, and the result is what often appears to be a cacophony of different values, lifestyles, beliefs, and practices. On any given day in the United States, for example, the individual picking up a newspaper or watching television may be confronted with the views of right-to-lifers, the Christian Coalition, gun control advocates, prostitutes' associations, lesbians for Christ, advocates for the disempowered, corporate advertising of every description, advocates for the legalization of drugs, crusaders against McDonald's, people who want to fight pornography on the internet, people who think television sitcoms are a threat to family values, and so on.

Now, there are many who revel in this diversity, but for others the flourishing of alternative lifestyles and points of view that are antithetical to their own brings only discomfort. But this is not the problem which concerns us here.

The Soviet experience

This chapter and the next one are devoted to the economics of communism. In an attempt to understand how these systems work, one good place to start is with the fact that within the planning sector (comprising, for example, roughly 80 percent of the 46,000 industrial enterprises located throughout the former Soviet Union in the mid-1980s), the use of money is severely circumscribed. Thus, “in the Soviet banking system the absolute order to pay is unknown; payments from any account are made only if in agreement with the applicable rules and authorizations.” Similarly, in China prior to 1979, only currency in circulation was considered by the authorities to be money, and monetary policy consisted primarily of regulating the amount of currency in circulation. Individual households could hold savings and time deposits in banks, but not checkable deposits. The “transfer balances” of government agencies and enterprises were transferable only with explicit hierarchical approval. Before giving approval, the banks in each case had to ensure both that the transaction had received prior authorization by the proper authorities in accordance with the economic plan and that all papers relating to the transaction were in order (see Cheng 1987 for details).

Consequently, a distinction became popular between “active money” and “passive money” (Wiles 1962). Passive money (the transfer balances of enterprises) may be a decision-making criterion for the planners but not for the enterprises.

The questions

Why was Caesar assassinated? Why have some dictatorships been stable and long-lasting (those in the USSR, China, Cuba, Iran), whereas others have proved to be unstable and very short-lived (such as many of the regimes in Africa and Latin America in the 1960s and 1970s)? Why did the regimes in South Africa and the former USSR collapse? Just as important, why didn't they collapse sooner than they did? Why have countries such as South Korea, China, and Chile grown so fast in recent years? Is political dictatorship good for economic growth? Why are some regimes (Stalin's Russia, Hitler's Germany, Pinochet's Chile) extremely repressive, whereas others are less so? Why do even relatively repressive regimes have periods of thaw in which the level of repression is temporarily reduced? Have dictators such as Cuba's Fidel Castro or Iraq's Saddam Hussein stayed in office so long because of their capacities to repress their peoples, or because they are popular? Can the answer be: both? Was Adolf Eichmann, the transportation coordinator of the Final Solution to the Jewish question, himself guilty of the crimes committed by the Nazi regime, or was he just a cog in the machinery of mass murder? Should functionaries in other regimes – such as those in Argentina, South Africa, or China, which committed massive violations of human rights – be tried for the activities practiced by those regimes?

All of these questions, and others like them, concern different aspects of the behavior of dictatorships.

Introduction

This part of the book looks at some aspects of the dynamics of dictatorship – that is, its origins and some of its consequences. This chapter is concerned with political inaction – the conditions under which democratic politicians may fail to respond to or provide leadership on important political issues, thus effectively suppressing the demands of their constituents to “do something” about them. The inertia or powerlessness of democracy under certain conditions is one of the seeds of dictatorship, since dictators can act under many circumstances in which democratic politicians cannot. I show the forms of social structure which are particularly likely to result in this pathology – for example, polarized political parties, rigid political preferences, and lack of trust in politicians and in the political system.

Another germ of dictatorship is ethnic conflict and nationalism. These phenomena are modeled in Chapter 12. Ethnicity is modeled as a capital good which reduces the transaction costs of market and political exchange within the group. Investments in ethnicity have two peculiar features:

1. Much of the investment is done by parents for the benefit of their children

2. The payoff to an individual depends on investments made by others in the group and on the group's collective (political) choices.

Hence the potential for conflicts of various sorts, both between groups and between generations. I show that neither market nor democratic political mechanisms can easily resolve these conflicts.

The Cambridge series on the Political Economy of Institutions and Decisions is built around attempts to answer two central questions: How do institutions evolve in response to individual incentives, strategies, and choices, and how do institutions affect the performance of political and economic systems? The scope of the series is comparative and historical rather than international or specifically American, and the focus is positive rather than normative.

What makes citizens comply with various costly exactions of government, particularly those like military service in which citizens risk losing their lives? In a provocative effort to provide a rational choice perspective on democratic legitimacy, Margaret Levi argues that citizens will prefer to comply provided the personal costs of compliance are not too burdensome. However, she argues, citizen compliance is contingent, requiring a positive assessment of both government trustworthiness and ethical reciprocity, the likelihood that other citizens will also do their share. Her evidence is rich and varied. She shows how mutual distrust between linguistically separate subgroups during two world wars made ethical reciprocity and “fair shares” arrangements unobtainable. Moreover, institutional arrangements making government commitments credible are essential to getting people to act on the belief that any fair shares arrangements will be enforced, and variations in credibility explain differences in the success of conscription. Finally, she shows how different personal costs of obtaining the status explain varying extents to which people became conscientious objectors.

This book examines, in historical perspective, changes in the role of the state with regard to public ownership and the scope of welfare in the main industrial and transitional economies. These changes have stimulated illuminating debates on the state's size, range, and functions. They have also involved important transformations – the shifting of boundaries between the public and private sectors, the carrying out of large privatization programs, and the reevaluation of the nature and content of public welfare. These debates and transformations are of singular importance for understanding the actual and potential scope of the state in any economy.

The term industrial economies refers herein first and foremost to the main Western European countries – namely, the United Kingdom, France, and Germany – and to the United States. Whenever appropriate, the framework is expanded to include the entire so-called Group of Seven (G7) industrialized countries. The term transitional economies refers first of all to Russia and, whenever necessary, to its former Central and Southern European satellites. I believe that the developments in these Western and Eastern countries since World War I concerning public ownership and welfare present compelling correspondences, notwithstanding great differences in scope, timing, and type of system. These correspondences deserve to be brought to light and examined on a comparative basis. (The focus on West and East as defined does not mean, of course, that detailed examinations of germane reforms in other countries are of less importance or interest.)