Monday, January 26, 2009

Rationality and Decentralization in Montesquieu's Spirit of Laws

In his famous article "The Nature of the Firm", Ronald Coase claimed that firms exist because they are cost minimizing. It is cheaper to coordinate a set of economic processes using methods available to business concerns than on the market. Coase thus suggests that marginal costs of organization will tend to be equated to the returns from organization. In general, the larger the firm the greater the costs of organization. Transactions involved in maintaining complex or large organizations are more costly than transactions involved in maintaining smaller ones. Firms grow to an optimal size given the costs and benefits to scale. Economies of scale refer to declining unit costs because of increasing sized firms' increasing ability to spread overhead over a large number of units. But increasing organization costs, also due to increasing size, may outweigh the costs per unit.

Anticipating Coase by more than two centuries and relying on comparative historical analysis, Charles de Secondat, Baron de Montestquieu, makes a parallel claim about the benefits of scale in the design of republics. Montesquieu writes that the optimal size of republics is small, because large scale republics permit large fortunes, which in turn create immoderate demands by interest groups. The competition of special interests leads to an overemphasis on private concerns and an underemphasis on the public good:

"In an extensive republic the public good is sacrificed to a thousand private views; it is subordinate to exceptions, and depends on accidents. In a small one, the interest of the public is more obvious, better understood, and more within the reach of every citizen; abuses have less extent, and of course are less protected."*

Montesquieu gives as an example the Greek republics, which were small city states. Montesquieu also notes that there are advantages to great as opposed to petty states. Thus, he is arguing for a balance, or optimization, of benefits as opposed to costs. In Book IX Montesquieu notes that small republics may be destroyed by foreign invasions and large repulics are destroyed by "internal imperfections". But, argues Montesquieu "confederate republics" have the advantages of a republic together with the external force of a monarchical government. "Hence it proceeds that Holland, Germany and the Swiss cantons are considered in Europe as perpetual republics." The many states balance power. Insurrections in one state can be quelled by others. But confederacies must consist entirely of republics (this was integrated into the Constitution). I would add that confederacies permit intelligent management of information while permitting economies of scale with respect to defense and economic markets.

Of course, there are many other factors relevant to the nature of government. In writing about the geographical differences between Europe and Asia**, Montesquieu notes that geographical differences facilitate the "slavery" of Asia and identifies large scale with despotism:

"In Asia they have always had great empires; in Europe these could never subsist. Asia has larger plains; it is cut out into much more extensive divisions by mountains and seas; and as it lies more to the south, its springs are more easily dried up...Power in Asia ought, then, to be always despotic: for if their slavery was not severe they would make a division inconsistent with the nature of the country."

In the 1960s and 1970s, Mancur Olson and George Stigler argued that ease of organization of interest groups and the economic benefit per participant due to successful lobbying lead to success or failure of specific groups in economic competition. For a long time physicians formed a successful lobby because they shared common training, common values and attended conferences of the American Medical Association. Geographic advantages would certainly be among the kinds of advantages different interests might enjoy. Geography, argued Montesquieu in 1748, contributes to the nature of political organization, and large geographic scope is most consistent with despotism.

A school of historians, to include William Appleman Williams, Gabriel Kolko, Martin Sklar and James Weinstein, has identified Progressivism, which appeared following the advance of big business and the closing of the American frontier, as a pro-big business ideology; that Progressivism was the ideology of big business even though it was packaged as "liberal" and served to preempt socialism (and end laissez-faire capitalism). Montesquieu did not anticipate Progressivism, but he did anticipate that as nations grow in scope they are more likely to be dominated by economic special interests and that the domination is likely to be authoritarian in nature, which is the claim that Kolko-Williams school makes about Progressivism.

Montesequieu also anticipated the ideas of David Riesmann in his famous book The Lonely Crowd. In Book XIX Montesquieu discusses "Laws in relation to the principles which form the general spirit, the morals and customs of a nation".*** He notes that factors like climate, attitudes toward tyranny, religion, laws, morals and other factors influence "the spirit of mankind". He argues that nations ought to pass laws that fit their temperaments. In a puritanical nation with good character "no one ought to restrain their manners by laws, unless he would lay a constraint on their virtues." For instance, laws that reduce luxury or restrain women might cause the nation to "lose that peculiar taste which would be the source of the wealth of the nation, and that politeness which would render the country frequented by strangers." Thus, it is difficult to be rational with respect to law, and it is easiest to fit the temperament of the populace in designing law. Law should be avoided:

"Let them but leave us as we are, said a gentleman of a nation which had a very great resemblance to that we have been describing, and nature will repair whatever is amiss..our indiscretions joined to our good nature would make the laws which should constrain our sociability not at all proper for us."

If laws are necessary, they should build on existing patterns

One of the key attributes (Book XIX, section 8) is "effects of a sociable temper". This is analogous to Riesmann's other-directedness. Montesequieu writes:

"The more communicative a people are the more easily they change their habits, because each is in a greater degree a spectacle to the other, and the singularities of individuals are better observed. The climate which influences one nation to take pleasure in being communicative, makes it also delight in change, and that which makes it delight in change forms its taste.

"...the desire of pleasing others more than ourselves gives rise to fashions. This fashion is a subject of importance; by encouraging a trifling turn of mind, it continually increases the branches of its commerce."

Riesmann notes that the commercial centers are characterized by other-directedness while rural America is still inner- and tradition-directed. Likewise, David McClelland finds in his book Achieving Society that high achievers couple other-directedness with need for achievement. But McClelland was writing after America's greatest achievements were complete. The inner-directeds' achievements were in building a great nation, the other-directedness in consumption and mass communication. Other-directedness, as in Athens and likely Rome, are associated with decline after the inner-directeds have built their vision.

Montesquieu anticipated 20th century arguments such as Walter Lippmann's claim that the public is incapable of rational democratic decision; Mancur Olson's and George Stigler's claim that in a democracy special interest groups tend to organize along economic contours and extract rents from the public; and James March and Herbert Simon's claim that boundaries on rationality inhibit firms from thinking strategically or clearly.

Montesquieu notes the link between commerce and communication.++ It is likely that other-directedness is most advantageous where coordination is more important, i.e., in large firms and in interpersonally driven-tasks involving diplomacy or sales.

He adds:

"The effects of commerce is riches; the consequences of riches, luxury; and that of luxury the perfection of the arts. We find that the arts were carried to great perfection in the time of Semiramis; which is a sufficient indication that a considerable commerce

This is seen in his claim that the necessities of state and those of the taxpayers need to be balanced in assaying taxes, but that few politicians have "the wisdom and prudence" to limit tax levels.+ The wisdom required in a very large state is greater than the wisdom required in a small one. Much as Coase argued that there are limits to economies of scale, so Montesquieu argued, 220 years before Coase, that there are limits to the advantages of the scale of nations.

*Montesquieu, The Spirit of Laws. New York Prometheus Books, 2002. Translation originally published in New York by the Colonial Press, 1900, p. 120.
**Ibid., Book XVII, section 6, p. 269.
***Ibid., p. 292
+Ibid., p. 207
++Ibid., p. 334.

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