Does Capitalism Suffer Cycles of Statism?

18 June 2009 at 8:52 am 2 comments

| Benito Arruñada |

Does the current expansion of the State reverse a previous reduction, to be reduced once again in the future? Or, alternatively, is there a sort of ratchet effect, with a trend towards greater statism disguised by cycles along such increasing trend?

cycles1I am inclined to think that cycling has not taken place around a stationary average but around an increasing tendency (see the figures). But perhaps a better way of facing these questions would be to disaggregate in different dimensions. For instance, in several papers with Veneta Andonova we argue that freedom cycles2of contract has been in  decline for more than a century in Western Law, both in civil- and common-law countries. Something similar could probably be said about trade, but in the opposite direction. However, in both freedom of contract and trade, it might be the case that exchange opportunities have expanded mainly as a result of technological change (e.g., cheaper transportation and communications), whatever the legal constraints. In terms of research, how could these trends be measured?

These thoughts were triggered by a timely and extremely suggestive paper by Witold J. Henisz presented at the Workshop on “Manufacturing Markets” organized last week in Villa Finaly, Florence, by Eric Brousseau and Jean-Michel Glachant.  My next few blogs will address other aspects of Henisz’s views on the broader challenges facing capitalism.

Entry filed under: Business/Economic History, Classical Liberalism, Conferences, Former Guest Bloggers, Institutions, Myths and Realities.

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2 Comments Add your own

  • 1. Richard O. Hammer  |  18 June 2009 at 8:06 pm

    You ask a most important question: “how could these trends be measured?”

    I agree with your observation of a ratchet effect. States grow and rarely shrink. But we do not seem to have a way of measuring this.

    Groping, I think of choice space. We have choices as we live and act. The wealthier we are, the more choices we have. And the state, in its continuous growth, sweeps in control of more choice space.

    While an economy grows, the choice space of private parties can grow even while the state is growing, even while the state continues to capture more choice space. So it is possible for a country to get richer while its state is growing, e.g. U.S. history to date.

    But, if we can get a handle on choice space and measure it, I suspect that a review of historical states will show an inflection point, in many cases, some point at which the state has captured enough choice space to cripple further growth of the economy. Thereafter the country becomes poorer and eventually the state collapses, as I believe I see in the examples of Rome and Czarist Russia.

    I elaborated upon this here.

  • 2. Michael E. Marotta  |  20 June 2009 at 6:18 am

    BA: “… freedom of contract has been in decline for more than a century in Western Law, both in civil- and common-law countries. Something similar could probably be said about trade, but in the opposite direction.”

    Is this to say that trade and regulation are cyclically out-of-phase? Real estate prices and construction activity are so. As land values fall, more new construction begins.

    About 1000 years ago when I was a teenager, I found at a library sale CYCLES: THE SCIENCE OF PREDICTION by Edward R. Dewey and Edwin F. Dakin (Henry Holt 1947). Ozone measured at Kew, lynx pelts, and, of course, sunspots, as well as wheat prices, common stocks, and all the rest. Life is cyclical.

    How we measure the cycles of capitalism depends on how we define capitalism. For most of my life, I agreed with Ayn Rand that capitalism began with the English Enlightenment, 1750. However, I find deeper truth in Peter Bernstein’s assertion that it was the calculablilty of risk that set capitalism apart from merchantry. Every culture and age had merchants. Capitalism was a special event.

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