Could an Italian Economist Born in the 19th Century Offer an Answer to Our Political Prayers?

Obama, McCain, somebody bound to lose, or nobody at all? The question engulfs us. All presidential elections are important but this one is outright critical because the nation faces threats numerous and foreboding, including calamitous climate change, sky high oil prices, terrifying terrorism, ballooning national debt, soft financial markets, dollar depreciation, and stagflation.

Swing voters will decide this momentous matter. Many independents look to the candidates for clues about policies they will push if elected. Some voters try to discern which policies are most likely to help their own wallets. As Bryan Caplan shows inThe Myth of the Rational Voter, however, a surprising number vote their hearts, confident that in a majoritarian system with large districts their individual vote will not decide the contest. A wealthy individual, for example, might costlessly feel good about voting for Obama even though higher taxes will likely result if he is elected.

Americans would do better for themselves and their country if they were to vote based on a balanced assessment of candidates’ proposed policies. In other words, they should behave like statesmen rather than self-interested materialists or bleeding hearts. One way to do that is to support policies that are Pareto improving, that help out some individuals or groups without injuring anyone. Named for Italian economist Vilfredo Pareto (1848-1923), such analysis is rational but runs afoul of natural human jealousy and a sincere desire on the part of many people to aid society’s worst off. Non-Pareto policies, however, usually incur the wrath of those who would suffer by them, leading to inaction or socioeconomic and political instability.

Colonial Americans rebelled to stop the imposition of non-Pareto policies, including fiscal, trade, and monetary policies that benefited Britain at their expense. Ironically, the newly independent states picked up where King George left off, implementing tax and monetary policies that aided some at the expense of others. Where urban elites heavily taxed cash-strapped farmers, rebellions like Shays’ took place. Where debtors implemented policies that hurt creditors, like bills of credit emissions that lightened debt burdens by causing inflation, a rebellion of capital greatly reduced private lending and investment. Many societies stay locked in such patterns, implementing only non-Pareto policies. In some cases, one group exploits the rest of society for long periods while in others control of the government flip flops frequently between elites and the masses. Ultimately, hatred, distrust, and stagnation rule.

The young United States, however, was able to break the pattern by implementing a Pareto improving policy par excellence, the Constitution. That document did little directly to help society’s worst off, slaves, women, and common farmers. But it did not injure those groups either. (Some subsequent policies may have hurt them but others, including the 13th, 14th, 15th, and 19th Amendments, improved their condition. The analysis here is on the Constitution proper, not every policy implemented under it.) Moreover, all domestic groups benefited indirectly from the political stability and economic prosperity the Constitution ushered forth. “You all know,” Samuel Blodget Jr. reminded readers early in the nineteenth century, “the comparatively miserable state of our country, when, in the years 1787 and 1788, our wharves were destitute of shipping, our poor in rags, their houses in the most ruinous state, their farms fenceless, and the low prices of our produce were scarce sufficient to defray the cartage to market.” After implementation of the Constitution, by contrast, “the country prospered beyond all former example. New villages, towns and cities sprang up as if by magic: our agriculture flourished, and our commerce extended to all parts of the globe: our public and private credit became universal.”

Economic historians concur. In 1790, per capita income was only $48 in current money but by 1800 it was $90. Over those same years, the overall size of the economy increased from $190 to $480 million. And the money supply, which was dreadfully deficient in the 1780s, increased from $29.1 million to $55.5 million during the 1790s. Entrepreneurship blossomed as well, the number of corporations jumping from 29 at the end of 1789 to over 300 by the time Thomas Jefferson took office. Some of those corporations, like banks and insurers, helped businesses to finance and safeguard their operations. Others, including numerous bridge, canal, and turnpike corporations, created infrastructure that helped businesses to buy needed inputs and to sell their outputs. Typical interest rates for prime borrowers also dropped, from double digits to about six percent. Unsurprisingly, land values jumped, a great boon to the nation’s many landholders and their dependents.

European wars might have helped the U.S. economy in the 1790s but without the Constitution it is doubtful that farmers and merchants would have been able to take advantage of them. By establishing a frame of government unlikely to rob white males of their lives, liberties, or property, the Founders created powerful incentives to work, innovate, and trade. As British observer William Winterbotham noted in 1795, in America the “laws and government have for their basis the natural and imprescriptible rights of man: liberty, security of person and property, resistance against oppression, doing whatever does not injure another, ... and an equal chance of arriving to places of honour, reward, or employment, according to their virtues or talents.”

Voters and politicians today could learn much from the Founders and the Pareto improving document they forged. Politics does not have to be zero sum, a game where one person’s gains come at the expense of others. It is often (but alas not always) possible to aid some, even most, without goring anybody’s ox. But it requires inputs that seem to be in short supply at present, statesmen-like behavior and dispassionate, nonpartisan policy analysis.