Digressions&Impressions

Adam Smith (and Judith Butler) on Petty Sovereigns and State Capacity

China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects or despises foreign commerce, and which admits the vessels of foreign nations into one or two of its ports only, cannot transact the same quantity of business which it might do with different laws and institutions. In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarins, the quantity of stock employed in all the different branches of business transacted within it can never be equal to what the nature and extent of that business might admit. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits. Twelve per cent accordingly is said to be the common interest of money in China, and the ordinary profits of stock must be sufficient to afford this large interest.--Adam Smith (1776) Wealth of Nations, 1.9.15 [emphasis added]

In a very important article (here), Ryan Hanley looks at what Smith has to say about China (and Tartary). As Hanley shows Smith comments on the political economy of China and, simultaneously, holding a complex, concave mirror to European eyes. The quoted passage above was once famous in debates over to what degree (according to Smith) there is a limit to economic growth as such or whether (as the second quoted sentence suggests) any such limit would be context (institutions/norms) dependent. Smith clearly suggests that allowing more foreign exchange would kick-start Chinese growth.

As an aside, it is also notable that in a stationary state, interests rates are so in China. According to Smith's theory of interest rates, these should (all things being equal) be low in a country with negligible economic growth. (For Smith, high interest rates tend (again other things being equal) to reflect many economic opportunities.)

Of course, ceteribus is not paribus, and this gets me to the main points of today's digression; according to Smith, Chinese political economy is oligarchic in character: with formal and informal laws favoring the rich. As the emphasized passage reveals, Smith notes two features: (i) property rights are protected unevenly (and biased toward the rich); (ii) in practice, this is due to the fact that for the non-rich experience of the state bureaucracy consists of encounters with what Judith Butler fruitfully calls 'petty sovereign.' I quote a key passage (which plays an important role in the research of my colleague Marieke de Goede): 

Petty sovereigns abound, reigning in the midst of bureaucratic army institutions mobilized by aims and tactics of power they do not inaugurate or fully control. And yet such figures are delegated with the power to render unilateral decisions, accountable to no law and without any legitimate authority.--Judith Butler (2004) Precarious Life, p. 56 

As I said above, Smith's remarks on China are fruitfully read as simultaneously comments on the European situation. Hume had (recall) famously argued (against the republican ideology) in his essay, "Of Civil Liverty:" "that civilized monarchies, what was formerly said in praise of republics alone, that they are a government of Laws, not of Men. They are found susceptible of order, method, and constancy, to a surprizing degree. Property is there secure; industry encouraged; the arts flourish; and the prince lives secure among his subjects, like a father among his children." Yet, in the next paragraph Hume went on to note an important exception to this claim:

The greatest abuses, which arise in France, the most perfect model of pure monarchy, proceed not from the number or weight of the taxes, beyond what are to be met with in free countries; but from the expensive, unequal, arbitrary, and intricate method of levying them, by which the industry of the poor, especially of the peasants and farmers, is, in a great measure, discouraged, and agriculture rendered a beggarly and slavish employment. 

In particular, the French crown sold taxing-rights to private individuals, who paid the tax and then levied the tax (and surplus) from the population. (Nobles and Clergy also had separate rights to tax those under their jurisdiction.) This system generated oppression and prevented economic growth.

Hume goes on to argue that such policies also hurt those hurt the rich landowners (the nobility) because agriculture is greatly discouraged and so their landholdings and rents are lower than they would be. It is a bit of shame that Hume, who sounds like a modern economist here, fails to explore the possibility that the nobility actually prefers high inequality, which is a source of their political influence, and more power over more wealth to themselves if this entails that other people also grow wealthy and so a loss of their power/status. 

Let me return to Smith. The political structure that allows bureaucratic petty sovereigns maintains a situation in which the property rights of the rich are better protected than the poor. (Presumably the rich have better access to upper reaches of the bureaucracy to get redress against any abuses.) It is creepy how this anticipates the core insight of Katharina Pistor's model about the unequal protection/enforcement of debt contracts. Smith cleverly models the consequence of this as an economic monopoly; because of the insecurity of property rights of the poor, their already bad position to compete economically is discouraged even more. [To return to a point from before, the high interest rates reflect, in part, the risks associated with uneven enforcement of property rights.] Stagnation entails "low wages for the labor" of the poor.

In addition, the trade barriers, prevent competition from abroad. The politically created economic monopoly now has the power to ensure that the status quo reproduces itself; hence China's stability and stagnation. I am pretty sure, Smith's model of treating such barriers as creating monopolies inspired (recall) a nice argument in Grouchy's Letters.

As Hanley shows, Smith [who grants that the sources are imperfect] explains the underlying cause of the Chinese state affairs by the perverse incentives created by its tax system. The reason why China grew wealthy is, according to Smith, due to the willingness of Chinese “executive power [that] charges itself both with the reparation of the high roads, and with the maintenance of the navigable canals” (WN V.i.d.17) and that “the sovereigns of China” have been historically “extremely attentive to the making and maintaining of good roads and navigable canals, in order to increase, as much as possible, both the quantity and value of every part of the produce of the land, by procuring to every part of it the most extensive market which their own dominions could afford” (WN V.ii.d.5). [quoted Hanley p. 373].

The central government's public works policy is not explained by Smith with reference to concern for public welfare, or to Mencius' philosophy, but (as Hanley notes) to the nature of the tax system: "the revenue of the sovereign arises almost altogether from a land tax or land rent, which rises or falls with the rise and fall of the annual produce of the land. The great interest of the sovereign, therefore, his revenue, is in such countries necessarily and immediately connected with the cultivation of the land, with the greatness of its produce, and with the value of its produce." Smith goes on to make clear (and this echoes the Humean point above) that the Chinese example shows that modern European states are quite capable of managing extensive public works that, indirectly, promote their own tax-income. ("in some parts of Asia this department of the public police is very properly managed by the executive power, there is not the least probability that, during the present state of things, it could be tolerably managed by that power in any part of Europe.") Smith's role as a theorist of state capacity seems to me under-theorized (and made invisible by the contemporary focus on biopolitics).*

Now Smith's Humean point is that state capacity can misfire when incentives are not properly lined up. For, he writes about Chinese tax-collection (in a manner echoing Hume's point about France) that "a public revenue which was paid in kind would suffer so much from the mismanagement of the collectors that a very small part of what was levied upon the people would ever arrive at the treasury of the prince. Some part of the public revenue of China, however, is said to be paid in this manner. The mandarins and other tax-gatherers will, no doubt, find their advantage in continuing the practice of a payment which is so much more liable to abuse than any payment in money." 

Here the absence of money as a means to pay taxes facilitates abuse.* Against the recent literature by proponents of modern monetary theory, where (with reference to an example early in Wealth of Nations) Smith is often caricatured as promoting a theory of money that is focused entirely as a unit of exchange, Smith is quite aware of money's functional role in taxation. Smith is clear that money makes standardization in taxation possible and the effect of this is to reduce the room for the arbitrary power of petty sovereigns. 

Piketty's Taxation --> Transparency Argument

The benefit of the global progressive tax on capital is that it will help to stop tax havens and make wealth inequalities a matter of public record:

3E. Lack of Transparency: r > g entails high levels of wealth inequality that are easy to hide under present legal conditions. This makes the true distribution of wealth inaccessible to the voting public, preventing them from making rational collective decisions.

3P. Increasing Transparency: A global progressive tax on capital will stop tax havens and other institutions that make it difficult if not impossible for the general public to know the distribution of wealth, as the taxing power will generate accurate records.

Piketty is happy to place a great deal weight on 3P. This means that if 3P fails, it is an enormous problem for the normative arguments in the book.--Kevin Vallier

Vallier and I agree that 3E/3P play a huge role in Piketty's book. I had called attention to them in one of my earlier posts, but Vallier's post is very useful for the careful focus he puts on them. Vallier goes on to argue that (i) that taxation is not necessary for generating this transparency; (ii) the goal of transparency can’t justify the level of taxation Piketty endorses. Let's grant (ii), although Piketty has different arguments for the level he advocates. Let's grant (i), too.

Even so, all Piketty needs is the argument that (i*) taxation is among the most likely to succeed means for generating transparency. One might worry that because Piketty has been working with tax-related-data he might be biased in favor of (1*). So, here's an argument-strategy (3P*) in favor of (i*) that Vallier does not consider and that I am pretty sure is what Piketty is after and that deploys premises that are independent of his framework:

• When governments have an interest in the matter then they will do their very best to get the data on the table.
• Governments survive on taxation.
• There is a LOT of global wealth
• So, once governments tax global wealth, governments will put their full power behind getting the best data on global wealth on the table.

On the Modern origins of the Epistemocracy

The subject is surely the most worthy curiosity of any the wit of man can possibly devise. And who knows, if this controversy were fixed by the universal consent of the wise and learned, but, in some future age, an opportunity might be afforded of reducing the theory to practice, either by a dissolution of some old government, or by the combination of men to form a new one, in some distant part of the world?--Hume "Idea of a Perfect Commonwealth"

David Hume's political thought, which councils "reverence to what carries the marks of age," is often and understandably treated as a species of Conservatism.*  As Jonathan Israel puts it, "his was a 'moderation' apt only to underpin prevailing usage." (Democratic Enlightenment, 226) In fact, Israel is so keen to contrast Hume with more radical (Spinozistic) approaches, that in drawing on the Natural History of Religion, he reads Hume as a Newtonian providentialist, reinforcing "acquiescence in divine governance of the world." (Israel, 211)

Oddly enough for an author focused on rehabilitating the significance of political ideas in political events, Israel entirely overlooks Hume's essay on a Perfect Commonwealth. According to Hume identifying the "most perfect" "form of government" is the subject of the essay. While the topic is treated as  "speculative," it is not belittled--on the contrary, it "surely" is "the most worthy curiosity of any the wit of man can possibly devise." That is, it is most important subject in philosophy. Hume is also explicit in the passage quoted above that he is trying to identify a "system of government" that could be put in practice after, say a revolution or a new founding. So, while Hume is not advocating revolution (that would be sedition), his project is not merely speculative. In fact, rather than setting the ideal in some imaginary place (and he is explicit about the contrast with Utopia and Oceana), he locates it in "Great Britain and Ireland." (Along the way he also insists that the idea that "no large state, such as FRANCE or GREAT BRITAIN, could ever be modelled into a commonwealth," is false.)

Hume and Machiavelli (Mercenaries and Taxes)

Historians inform us, that one of the chief causes of the destruction of the ROMAN state, was the alteration, which CONSTANTINE introduced into the finances, by substituting an universal poll-tax, in lieu of almost all the tithes, customs, and excises, which formerly composed the revenue of the empire. The people, in all the provinces, were so grinded and oppressed by the publicans, that they were glad to take refuge under the conquering arms of the barbarians; whose dominion, as they had fewer necessities and less art, was found preferable to the refined tyranny of the ROMANS.--David Hume "Of Taxes"*

If we look for the causes which first led to the overthrow of the Roman Empire, they will be found to have had their source in the employment of Gothic mercenaries, for from that hour the strength of the Romans began to wane and all the virtue which went from them passed to the Goths. --Machiavelli, The Prince (ch. 13)

It's clear that Hume had Machiavelli''s The Prince open at his desk while writing many of his essays--he does not shy away from explicitly praising and critically engaging with Machiavelli by name. Hume and Machiavelli agree, in fact, that the decline of the Roman Empire was a consequence of bad policy. But they disagree about its root cause: Machiavelli claims that fall was set in motion in virtue of employing foreign mercenaries--from that moment on the Roman rulers were not in control of their own destiny.

From our vantage point, Hume, who is writing in the age of the rising standing army, seems more modern with his focus on the consequences of disastrous tax policy. Constantine's willingness to change customary tax-policy (already a grave mistake in Hume's political understanding) in favor of an unjust tax-regime turns out to be disastrous.** (Margaret Thatcher also learned this the hard way,  ignoring the fact that Adam Smith called the poll-tax on freemen "altogether arbitrary or altogether unequal.") In Hume's account the roman rulers lost their authority because the heavily taxed citizens preferred the lighter taxes of the barbarous foreigners. In fact, in claiming this Hume agrees with Machiavelli's general point that a wise ruler should keep taxes low, and not mess with his citizens' property.