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Make Them Accountable / How to Kill the Goose that Lays the Golden Eggs

How to Kill the Goose that Lays the Golden Eggs

Chrystia Freeland, editor of Thomson Reuters Digital and the author of “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else”:

The Self-Destruction of the 1 Percent

In the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.

Venice’s elites were the chief beneficiaries. Like all open economies, theirs was turbulent. Today, we think of social mobility as a good thing. But if you are on top, mobility also means competition. In 1315, when the Venetian city-state was at the height of its economic powers, the upper class acted to lock in its privileges, putting a formal stop to social mobility with the publication of the Libro d’Oro, or Book of Gold, an official register of the nobility. If you weren’t on it, you couldn’t join the ruling oligarchy.

The political shift, which had begun nearly two decades earlier, was so striking a change that the Venetians gave it a name: La Serrata, or the closure. It wasn’t long before the political Serrata became an economic one, too. Under the control of the oligarchs, Venice gradually cut off commercial opportunities for new entrants. Eventually, the colleganza was banned. The reigning elites were acting in their immediate self-interest, but in the longer term, La Serrata was the beginning of the end for them, and for Venetian prosperity more generally. By 1500, Venice’s population was smaller than it had been in 1330. In the 17th and 18th centuries, as the rest of Europe grew, the city continued to shrink.

The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.

James Kwak:

Failure Is an Option

In Why Nations Fail, Acemoglu and Robinson outline a theory of how economic and political institutions shape the fate of human societies. They reinterpret the rise and fall of civilizations throughout history, showing how differences in institutions interact with changing circumstances to produce development or stagnation…

“Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people,” write Acemoglu and Robinson… Poverty is not an accident: “[P]oor countries are poor because those who have power make choices that create poverty.” Therefore, Acemoglu and Robinson argue, it is ultimately politics that matters…

In Why Nations Fail, states are often controlled by elites whose top priority is maintaining their own power, which means rigging both political and economic institutions in their favor…

The financial crisis and its aftermath recently revealed how tilted our economic and political playing fields can be. During the past three decades, large financial institutions rewrote their regulations, exploited the new rules to generate enormous profits, and poured a share of those profits back into politics. When several of these institutions collapsed after an orgy of creating, repackaging, and reselling mortgages, the federal government rushed to shore them up; many homeowners who took out those mortgages lost their houses to the same banks, leaving the impression that Washington is in Wall Street’s pocket.

The power of the financial sector is only one example of the broader threat to our inclusive political institutions: namely, the ability of the economic elite to translate their enormous fortunes directly into political power. In the wake of the Supreme Court’s 2010 decision in Citizens United, super PACs can mobilize unlimited amounts of money…

Are we likely to go the way of Venice?… Acemoglu recently said, “We need noisy grassroots movements to deliver a shock to the political system,” citing both the Tea Party and Occupy Wall Street as potentially helpful developments. As he recognized, however, the one with more staying power—the Tea Party—has been co-opted by well-funded, elite-dominated groups (including Americans for Prosperity). If a popular movement can be bankrolled as easily as an attack ad, it is hard to see what money can’t buy in politics.

The next test for America will be whether our political system can fend off the power of money and remain something resembling a real democracy—or whether it will become a playground where a privileged elite works out its internal squabbles.

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