James Macdonald's "A Free Nation Deep in Debt: the Financial Roots of Democracy" first appeared in 2003 and has been drawing good reviews since then (I am now browsing through the book). Here are two old reviews one by Gordon Wood here (which needs subscription) and one by Forrest McDonald here . ( The second review at http://www.claremont.org/publications/crb/id.1191/article_detail.asp). Both the reviews also review Bruce Mann's "Republic of debtors".
An excerpt from Forrest McDonald's review:
"Now let us turn to the area of public finance. Throughout the ages and until comparatively recently, the main reason governments or states needed funds was to bear the costs of waging war. In ancient times the method was simple: the winner defrayed the costs by looting and/or enslaving the vanquished. For the loser, the cost was not a consideration, for as a practical matter that side ceased to exist. Later, upon the emergence of absolute or nearly absolute monarchies, the economics of statecraft changed somewhat. Kings rarely had credit, for they were apt to renege on their obligations, and the moneyed classes went into hiding or hid their assets whenever agents of the crown came around. Normally, therefore, kings saved their revenues between wars, until they amassed enough to launch hostilities anew. When the funds, unless replenished by looting, ran out, they had to stop fighting. They repeated the cycle again and again.
The solution was the invention of public debt, which was possible only in states that were relatively free, for the essence of a public debt is that it is owed by the citizens of a state to one another. The central thesis of A Free Nation Deep in Debt is encapsulated in its subtitle, The Financial Roots of Democracy, and if allowance is made for the fact that James Macdonald really means free government and not "democracy," the argument is convincing and insightful.
Between the 13th and the 16th centuries, the city-states of Italy created a genuine system of public debt. Next came Holland, which was able to win its long war of independence from Spain even though the "parent" country was far richer and more populous—because Holland had an endless source of revenue in the form of public debt owned by its citizens."
Now a paperback edition is out and new set of reviews. Here is one by James Galbraith which reviews both Macdonald's book and "Economic origins of Dictatorship and Democracy" by Acemoglu and Robinson is available from Mark Thoma's site here. Some excerpts, first about Acegmolu and Robinson book:
"Work of this kind ... is not so much incomprehensible as pointless. It actually isn’t incomprehensible, if you work hard enough, but the symbols are empty, and the description is not of a real society, but of an institutional vacuum, uninhabited by actual human beings, untracked by actual data. No measurement will ever test the theory. ...
And yet, Economic Origins of Dictatorship and Democracy will be heavily cited, lavishly praised, and assigned to advanced seminars in the better graduate schools. Too bad. For it isn’t about democracy. It’s about a cardboard caricature... In sketching their caricature, Acemoglu and Robinson strip the democratic ideal of substantial and also of ethical content. ...".
But Galbraith's parise for Macdonald's book is lavish:
"For MacDonald, a British former investment banker, ... the progress of democracy is the expansion of the franchise, a word with two meanings: its present one of the right to vote and an ancient one meaning freedom from direct taxation. In turn, public debt ...[and] the institutions of finance, missing from Acemoglu and Robinson’s economics, suddenly take on the pivotal role...
It’s a simple but compelling argument. States exist to make war; those who win survive. Public credit is a powerful weapon; states that can borrow win wars. And so even narrow democracies, rooted in parliaments going back to the Middle Ages, have an evolutionary advantage over absolute monarchies, for the king’s credit is always poor. ...
A beauty of MacDonald’s idea is that it can be tested against situations he doesn’t discuss. Thus the democratic decolonization of India fits: It occurred after India had become a large war-time creditor of Britain. And the struggle for democracy in Latin America is complicated by foreign debt, easily analyzed as an external electorate of enormous power–one in obvious economic conflict with the voters who, at best, only hold the internal debt...
Given the simplicity and power of this argument, one reads the epilogue of this great book with surprise and sorrow. In MacDonald’s view, it’s all over. In the nuclear age, deficits and bond drives on the world-war scale are history, and the American citizenry has lost its pride of place as creditor of the American state. Today, financial intermediaries hold about 37 percent of U.S. public debt; Japan and China, along with other countries, now hold about 30 percent. The proportion of U.S. debt owned directly by Americans has fallen to below 10 percent; in 1945 (when the debt was more than twice as large in relation to GDP as now) citizen-creditors just about held it all. He concludes that the link is broken and "for all practical purposes, the venerable marriage between public credit and democratic government, so vital a factor in the history of the world, has been dissolved."
I do not quite understand the reference to India becoming a large war-time creditor to Britain. Perhaps somebody can explain. Another recent review of Macdonald's book is here.
UPDATE: Some version of Acegmolu-Robinson book seems currently avaialable online here. Despite the rave reviews of Macdonald's book, I feel that it is worth looking at other approaches. Macdonald's approach has the virtue of parsimony and explaining situations which he does not consider. But by now, conceptually democracy has a life of its own and like many evolutionary concepts, it has uses for what it was not originally meant for.
An excerpt from Forrest McDonald's review:
"Now let us turn to the area of public finance. Throughout the ages and until comparatively recently, the main reason governments or states needed funds was to bear the costs of waging war. In ancient times the method was simple: the winner defrayed the costs by looting and/or enslaving the vanquished. For the loser, the cost was not a consideration, for as a practical matter that side ceased to exist. Later, upon the emergence of absolute or nearly absolute monarchies, the economics of statecraft changed somewhat. Kings rarely had credit, for they were apt to renege on their obligations, and the moneyed classes went into hiding or hid their assets whenever agents of the crown came around. Normally, therefore, kings saved their revenues between wars, until they amassed enough to launch hostilities anew. When the funds, unless replenished by looting, ran out, they had to stop fighting. They repeated the cycle again and again.
The solution was the invention of public debt, which was possible only in states that were relatively free, for the essence of a public debt is that it is owed by the citizens of a state to one another. The central thesis of A Free Nation Deep in Debt is encapsulated in its subtitle, The Financial Roots of Democracy, and if allowance is made for the fact that James Macdonald really means free government and not "democracy," the argument is convincing and insightful.
Between the 13th and the 16th centuries, the city-states of Italy created a genuine system of public debt. Next came Holland, which was able to win its long war of independence from Spain even though the "parent" country was far richer and more populous—because Holland had an endless source of revenue in the form of public debt owned by its citizens."
Now a paperback edition is out and new set of reviews. Here is one by James Galbraith which reviews both Macdonald's book and "Economic origins of Dictatorship and Democracy" by Acemoglu and Robinson is available from Mark Thoma's site here. Some excerpts, first about Acegmolu and Robinson book:
"Work of this kind ... is not so much incomprehensible as pointless. It actually isn’t incomprehensible, if you work hard enough, but the symbols are empty, and the description is not of a real society, but of an institutional vacuum, uninhabited by actual human beings, untracked by actual data. No measurement will ever test the theory. ...
And yet, Economic Origins of Dictatorship and Democracy will be heavily cited, lavishly praised, and assigned to advanced seminars in the better graduate schools. Too bad. For it isn’t about democracy. It’s about a cardboard caricature... In sketching their caricature, Acemoglu and Robinson strip the democratic ideal of substantial and also of ethical content. ...".
But Galbraith's parise for Macdonald's book is lavish:
"For MacDonald, a British former investment banker, ... the progress of democracy is the expansion of the franchise, a word with two meanings: its present one of the right to vote and an ancient one meaning freedom from direct taxation. In turn, public debt ...[and] the institutions of finance, missing from Acemoglu and Robinson’s economics, suddenly take on the pivotal role...
It’s a simple but compelling argument. States exist to make war; those who win survive. Public credit is a powerful weapon; states that can borrow win wars. And so even narrow democracies, rooted in parliaments going back to the Middle Ages, have an evolutionary advantage over absolute monarchies, for the king’s credit is always poor. ...
A beauty of MacDonald’s idea is that it can be tested against situations he doesn’t discuss. Thus the democratic decolonization of India fits: It occurred after India had become a large war-time creditor of Britain. And the struggle for democracy in Latin America is complicated by foreign debt, easily analyzed as an external electorate of enormous power–one in obvious economic conflict with the voters who, at best, only hold the internal debt...
Given the simplicity and power of this argument, one reads the epilogue of this great book with surprise and sorrow. In MacDonald’s view, it’s all over. In the nuclear age, deficits and bond drives on the world-war scale are history, and the American citizenry has lost its pride of place as creditor of the American state. Today, financial intermediaries hold about 37 percent of U.S. public debt; Japan and China, along with other countries, now hold about 30 percent. The proportion of U.S. debt owned directly by Americans has fallen to below 10 percent; in 1945 (when the debt was more than twice as large in relation to GDP as now) citizen-creditors just about held it all. He concludes that the link is broken and "for all practical purposes, the venerable marriage between public credit and democratic government, so vital a factor in the history of the world, has been dissolved."
I do not quite understand the reference to India becoming a large war-time creditor to Britain. Perhaps somebody can explain. Another recent review of Macdonald's book is here.
UPDATE: Some version of Acegmolu-Robinson book seems currently avaialable online here. Despite the rave reviews of Macdonald's book, I feel that it is worth looking at other approaches. Macdonald's approach has the virtue of parsimony and explaining situations which he does not consider. But by now, conceptually democracy has a life of its own and like many evolutionary concepts, it has uses for what it was not originally meant for.
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