Wednesday, December 10, 2014

The Coase theorem meets global federalism

I just explained to my MAREB students the Coase theorem yesterday, and today I read this post by Branko Milanovic. I told my students that the theorem (if property rights are complete and transaction costs are zero, the parties to collective problems reach efficient solutions) had been used to justify massive privatization, and other policies such as trading in pollution permits. Of course, the theorem is a theorem and not a description of reality. Like the two welfare theorems, the Coase theorem gives the false impression that efficiency and distribution can be easily separated, but they are not. Plutocracies create inefficiencies. The particular distribution of property rights in Russia is linked to the failure of democracy, and the failure of democracy makes it difficult to develop a modern well functioning economy. The expectation, as Milanovic argues, was that the oligarchs would demand the protection of property rights through the rule of law, as the rich did in the US in the past, but the oligarchs moved their resources to other countries (where no one asks them about the origin of their wealth), because that is easy to do with globalization, so they do not need to demand the protection of property rights in Russia. It is utopian to think about a democratic global government that regulates global capitalism and redistributes at a global scale, but it was also utopian to think about a Europe without borders in 1945. Markets need rules and redistribution, and today markets are global, so rules and redistribution should increasingly work at the global level. In 1945 rules to constrain capitalism were mostly a national work in progress, Europe was a dream and global federalism was not even a proposition. Today nation states have done most of their work and are increasingly obsolete, Europe is a work in progress and global federalism has moved from nothing to a dream. That's some progress.

1 comment:

  1. The local public has an important role in any real progress. You can fine-tune rules, but they'll only make a difference if they're enforced. Each country makes its own rules, with legislators potentially setting up loopholes for themselves.

    I think the issue with nascent democracies is not so much that the rules aren't good or that they're not using some cutting-edge theorem.

    It's more to do with a culture of non-compliance with authority in general, which is deeply rooted in the communist experience. In my country, Hungary, you are not to comply with whoever's in power, that's the hard-wired lesson from centuries of oppression. It will take a long time to unlearn. Luckily, we're making progress now with the community-focussed Orbán government in charge - it's an irony of fate that the international perception does not reflect that at all.

    Property rules: any tinkering with property rules is as good as the commitment of wealthy individuals to observe them. The West is way ahead in this respect, but that's not due to rules, it's due to time and the focus on what's good for the community.

    Rules are there to benefit the community, including its compliant members, but never vice versa. Individuals only benefit when the critical mass is reached and maintained, i.e. the focus is on the community. That logic has yet to trickle down to the public in the East.

    As for progress in Europe: you've probably noticed that given the chance, the majority of people would vote against the EU. Which means that 'progress' is largely on bureaucrats' desks, not in the public mind. People need to feel involved, listened to, borne in mind and benefiting from the process to come on board.