Pareto's Republic and the New Science of Peace

by Filip Palda

  In these examples the peaceful solution does not try to eliminate the tensions that give rise to the conflict. Philosophers have noted that the elimination of aggression might even deny us our humanity. Karl Popper wrote in The Open Society and Its Enemies that “a human society without conflict would be society not of friends but of ants.” The trick instead is to travel from conflict to peace by making both sides see their common interest. Peace is an ongoing process that channels instincts of aggression and acquisitiveness into pursuits which, if they cannot always be called selfless, may at least add to someone’s well-being without causing intractable resentments in others.

  How to get a peace that transforms aggression into something productive captivates scholars and is the subject of this book. The challenge is to decide whether the transformation of aggression into peace is something we can only grope towards, or whether some formula exists for it. The Pharisaic rabbi Hillel the Elder had such a formula in mind when he stated that “What is hateful to you, do not do to your neighbour: that is the whole Torah, the rest is commentary.” This was a very precise mathematical statement of social obligations. It sought perfect balance in every exchange of effort or resources between people. Perfect balance meant you did not take advantage of someone when he or she was down to buy his or her farm at a depressed price. Hillel’s balance was a strict and highly specific formula for human interaction.

  Rabbi Hillel’s rule for balance in social interactions was one of many variants on what has come to be known as the Golden Rule. Plato also believed in a form of the Golden Rule, but in his version, a cadre of exceptionally gifted leaders had to clarify how this rule should be applied. In the 19th century a group calling themselves Utilitarians actually proposed a mathematical formula for peace and prosperity. That formula emerged from the stipulation that societies should work in a way to maximize the sum of happiness of their members. Karl Marx also turned his hand to producing a formula for social peace. He was among the first in history to produce a reasonably consistent argument for why a society should exterminate broad sections of its own population in the interests of prosperity and eventual peace.

  Today a science of peace is emerging that tries to unite strands from all of the social sciences to ask how the task of transforming aggression into something of mutual benefit can be accomplished. One sub-branch of this emerging science calls itself “peace economics” and of it Raul Caruso writes

  The core of peace economics has to be found first in the study of the interplay between productive and unproductive activities within societies. This is useful to understand both the long-run determinants of economic prosperity and the shaping and stability of institutions governing economic and societal life. In addition, it also contributes to understand the economic causes and pre-conditions which make actual violent conflicts possible. (page 3)

  Peace economics is but one legion in the army now mustering under the banner of the science of peace. Behind the banner stands a concept. It is called the principle of Pareto efficiency, and it can be used to explain how the private economy and the public sector should work individually, and together.

  Social accounting

  Before jumping into a discussion of Pareto efficiency we need to understand that no matter what approach to peace one takes, all approaches assume that some balance must exist in relations between people if they are to live in a society. The main contenders in recent history vying for the credit for some formula that captures this balance have been Marxists, Platonists, Utilitarians, Golden Rulers, and other offshoots from these schools of thought. This book will not look deeply into any of these philosophies; it is enough to accept that they shared a belief in the need to balance a type of ledger that one might call the “social accounts.” All systems of social accounting, even communism, try to keep a tally of who owes whom what for material property exchanged or favours done.

  All groups of people need a social accounting system so that they can coordinate their activities and decide how to use their resources. If your balance is in good standing with me, then you can ask me for help, or the loan of my car. Positive balances give people the means to cooperate with each other and perform collective activities, such as raising a barn or more recently organizing a flash mob. Without a sense of balance in these accounts people either disperse and the group disintegrates, or else people suffer and grow bitter at accumulating injustices. More generally, social accounting is a method for ensuring self-equilibrating exchanges that create balance between what people put into society and what they get out. Without this balance, the links between individual elements of the system threaten to dissolve and the system may lose its coherence.

  The most remarkable social dissolution in recent memory took place between 1989 and 1992 when the East Bloc communist countries threw off Marxism in favour of free markets. One favourite slogan among workers just before the fall was “you pretend to pay us and we pretend to work.” “What is two hundred meters long and eats cabbage?” asked the Soviet joke. “The queue in front of a butcher’s shop,” was the answer. Citizens of the East Bloc had a heightened sense of the absurd sharpened through living in a system of economic mismatching where there was little relation between effort and reward, or prices and demand. Without balance in social accounts, people grew estranged from government and from each other to the point where it was not revolution that brought down the East Bloc, but the dissolution of countless unbound parts.

  Two types of social accounting

  While there is much disagreement over how to balance the finer points of social accounts, a fairly clear division of opinion about the overall approach has emerged. Some believe that the best way to do so is to use the authority of an all-powerful government; others believe in more personal, face-to-face balancing. The terms you will hear scholars use are vertical (or centralized) coercive control, and horizontal (or decentralized) voluntary control. Both are what you might call information management systems that tally what people contribute and what they take from society. Yet both work very differently from each other.

  Under central control, someone in power dictates the use of resources to stifle conflicts between his or her subjects. Dictators are not the only ones who can exert this kind of control; so can village elders or respected community figures who impose their wills by force of custom. The moment an individual resolves disputes coercively or by using tactics of social pressure, he or she becomes an exponent of vertical control. Under lateral control, people must agree between themselves about how resources are to be used. Disagreements can be adjudicated by impartial arbiters of disputes, such as property rights courts. In principle, neither system is to be preferred over the other. Both are adaptations to particular circumstances. If Darwinism has taught us anything it is that adaptations survive only when they are advantageous.

  What is the advantage of central control? Societies that use the coercive power of the state or the weight of custom to balance social accounts can spare themselves the bother of investing in the legal apparatus needed to protect property rights. Central control relieves people from haggling over prices or engaging in long legal disputes over private property. That burden all falls to the planners.

  There are also disadvantages to central control. The larger the centrally controlled society grows, the more distant rulers become from their subjects. Governments that must decide what clothing people will wear and how to house them have to scrabble for information on their needs and their capacity to contribute. Simply asking people is misleading because talk is cheap. People will exaggerate their needs. This is why during their brief existence during the 20th century, centrally planned economies raised armies of managers and internal spies to sense the popular mood and root out shirkers, and on a more sophisticated plane, applied so-called input-output techniques for representing the entire economy as a spreadsheet capable–in theory–of balancing society’s accounts.

  Yet even if planners can get the calculation right, and the “if” is
big, central control comes burdened with another challenge. It concentrates power and creates the temptation to steal. The manager of a state company can pay his or her workers less than their contribution to production and pocket the difference for his or her own benefit. Poor social accounting due to theft sends the message to workers that it makes little sense to devote energy to the job. On the flip side, consumers become demoralized when they receive shoddy goods, and when they suffer shortages that result from corruption by managers.

  A solution to the problem of official corruption is to impose strict rules on those in control. Yet shearing the administrator of discretionary powers atrophies bureaucratic muscles and slows the organizational nerves needed to respond to the changing demands and abilities of the people. Confucian ethics that tried to raise the personal standards of administrators were an attempt to prevent bureaucratic stagnation. The hope was that once cured of their rapacious tendencies by the teachings of Confucius, mandarins could be trusted to use wide discretionary powers in the best interests of the empire. This ethic had some success in containing corruption but produced a conservative mindset ill-suited to dealing with sudden challenges. In communism, the makers of the Russian Revolution tried to instil a similar sense of custodianship coupled with dynamism.

  They made enormous strides in certain industries, but an influx of careerists diluted the pool of enthusiasts and eventually produced a cynical bureaucracy whose theft of public property could only be contained by the most stifling rules. As both societies grew and the challenges of balancing social accounts in a central registry mounted, neither imperial China nor communist Russia could find in their administrative systems the key that enabled them to continue their reigns.

  Instead of having someone above us keep accounts on our behalf, we might think of balancing these ledgers by ourselves. The reason to consider this is the reason that made central control founder: institutionalized lack of honesty. Perhaps by dealing face-to-face with each other, people can make their true desires known and respected. For this to happen and for individuals to become their own accountants, they must become masters of some little part of their domains. Without control over some resource, they have nothing to balance and decentralized accounting becomes at best a byword for chaos. So, for instance, being able to decide how to use your time allows you to perform favours in return for the promise of favours from others. Being able to call a farm your own allows you to trade its product for processed goods. The fact of owning human and physical resources empowers the individual to make calculations about the worth of his or her property and how it should be used.

  Here then is a possible basis for creating a system of social accounts that does not rely on the coercion of central planners. A system of privately owned property puts two powerful forces for honest social accounting into play—precisely the forces that central control lacks. The first force is called competition. It follows from the fact that if I offer you ten dollars an hour for your work, then your ownership of your time means that you are free to accept an alternative offer of eleven dollars. Rival buyers find themselves in a situation where each one goads the other to reveal the true price they are willing to pay for your time or any material resources you own. In this manner competition acts as a mechanism for uncovering the truth about willingness to pay. Revealing willingness to pay is the essence of honest social accounting. Honesty has the practical value that it keeps social accounts in balance. If people reveal what they are willing to pay, then they are sending a signal to suppliers who are equally willing to accept such payment. With both parties agreeing on an exchange, there can be no question that some leave the exchange less enhanced than before. Of course, we may trade the Jacobian chair handed down from an ancestor in the time of Queen Anne, and grumble about it, but the bitterness reflects a situation in life rather than the trade we undertake to improve to some degree a life beset by problems and regrets. This type of all-round improvement of a situation is the ink in which socially balanced accounts are penned.

  The second force that private ownership puts into play for the honest balancing of social accounts is protection from corrupt or inefficient governments, a protection that frees people to go about their business without fear of having it disrupted by human predators. Governments, by definition, hold a monopoly on force. A corrupt government is one in which a politician or bureaucrat can divert this force. Instead of using it for the public good, he or she uses force for his or her own private interest. The alderperson who uses the argument of eminent domain to expropriate a farm for the benefit of developers who have promised bribes is violating private control over property in a similar, though less obviously violent manner, as the marauder putting farms to the torch. True private property is protected against such depredations by laws that limit the ability of government representatives to use public powers to steal for private benefit. Theft is one of the clearest means by which to throw social accounts out of balance. Private property, if protected by law, discourages government theft. This is the opposite view of that held by the 19th century French anarchist Pierre Joseph Proudhon who quipped that “property is theft.” But a less well known quote of Proudhon’s is that “property is freedom.” By that he meant that property allows us to seek out our best destinies and that these destinies lie in property protected by the law. The law constrains us, but in so doing frees us to act within limits understood by all. But that is philosophy. This book is about science, the science of peace.

  Private property is at the heart of decentralized social accounting because property can be measured. We can better appreciate the importance of property rights as a method of measurement by looking at how people resolve disagreements over matters that have nothing to do with property. Spiritual and emotional issues are among the most contentious we know. One reason for this is that they defy attempts at measurement. They are hard to quantify and so offer little that a science of peace can be built upon. Ultimately, science is about understanding and controlling your environment, and what you cannot measure, you cannot control. John Chipman quotes Nobel Prize winning economist Ragnar Frisch, who summed it up nicely: “The real advances in science begin on the day that it is realized that vague common sense notions must be replaced by notions capable of objective definition” (page 59). A lack of objective definition and measurement is why matters of the heart remain the Wild West of human relations. There is no way to tally in a manner all can accept which side puts more into a romance or a friendship. Without such a tally, no good idea of balance in the relationship can be communicated to outside observers, and so society has no formal ability to dictate a peace of the heart. This is why personal relations are often chaotic and can be contained, if at all, only by religious or social appeals to the conscience. This is why property, which is measurable to some degree, can, with lesser controversy, help balance social accounts.

  What does efficiency mean?

  When individuals agree without coercion about how to use resources, they are approaching a condition that a 19th century railroad engineer who switched into the study of the social sciences at the age of forty-five, identified as having certain desirable features. Vilfredo Pareto, of whom I will say more in the next chapter, defined a particular distribution of resources as being efficient if no one could be made better off by a change in the distribution without making at least one person worse off. If you have an attic full of junk, then a middleman known as a picker can pay you a few dollars and convey the contents of the attic to someone who sees it as treasure. Pickers are emissaries of Pareto because they seek to move resources around in such a way that no one is hurt and at least one person benefits. The picker’s job is only done when there are no more deals to be had that satisfy at least one person and harm no one else. This end state of the market, in which all gains from trade are exhausted, is known in economics as Pareto efficiency.

  Societies geared toward Pareto efficiency seem to share three key features. First, any process leading to Pareto effi
ciency limits, but does not completely erase, the downside of agreements over how to use property. Since the agreement is entered into voluntarily, one can believe that both parties will have explored the personal consequences of their decision to shake hands. We can expect no closer an examination of the facts than that made by those most directly concerned. In this sense, Pareto-efficient agreements motivate all parties to think before leaping, and in so doing to avoid leaping into the more obvious pitfalls. Second, a society geared towards Pareto efficiency is one that thwarts the risky ventures of social planners who forget the individual in their pursuit of collectivist visions.

  Finally, and perhaps most importantly, Pareto efficiency provides society with a flexible form of social accounting. It does not require that all decisions benefit everyone equally, as in a strictly egalitarian society, but simply that these decisions harm no one. Such flexibility immensely broadens the scope of how property can be used, yet still within humane limits. In addition to their humane qualities, the three features of Pareto efficiency also tend to support economic growth. The evidence overwhelmingly shows that nations with Pareto-efficient dispute resolution mechanisms are among the richest in the world.