Will the Euro’s brief life come to an early end because of the bad spending habits of Italy and other members? Is an end to US economic woes in sight? According to a new book entitled Pareto’s Republic and the New Science of Peace, published by Cooper-Wolfling, the real question that should be asked is whether the European Union is heading for the same spectacular type of dissolution that brought down the Soviet Union twenty years ago. Economic woes may reflect a deeper malaise in US society. According to the author of the book, Filip Palda, Europe’s fiscal imbalance and US economic problems reflect an imbalance in what he calls "social accounts."
Every society stands or falls on whether a sufficient number of people believe they are getting at least as much as they are putting into that society. There were no fiscal deficits in the Soviet Union, but the gap between what people were rewarded for their work and what they could receive in return grew was large. "You pretend to pay us and we pretend to work" became the rallying cry for an indifferent nation.
Palda, who received his Ph.D. in economics from the University of Chicago, sees the same imbalance developing in the European Union and possibly in the US. "What you have in Europe are 300 million people from countries that do not particularly care for each other. It is not a promising formula for working together towards prosperity."
"But in its early days things looked promising because the common market started unifying Europeans in a decentralized, equilibrated manner. I am talking about trade of course, trade between individuals. That is the only mechanism for balancing social accounts that works in large anonymous societies."
"Provided that trade takes place under rules that are the same for all, then you attain something called Pareto-efficiency, which is the basis of all of economics. An exchange is Pareto-improving if it hurts no one and benefits at least one person. Once the opportunities for Pareto-improvement have been exhausted we reach a state of Pareto-efficiency.
"It sounds simple, but it has a highly desirable quality. Because the exchange is voluntary it hurts no one and has a potential upside for all. That creates a balance between the efforts people put into working and producing, and what they get in return, and that is the basis of a stable, prosperous society. The best medium through which we attain this state is private property, be it physical or human. This is why the protection of the right to do as we please with our property is the key to attaining Pareto-efficiency and why Pareto-efficiency is the best social accounting method."
Consider nations that are so similar in their basic makeup that they could be thought of as twins. In 1953, Korea split in two after a civil war. North Korea came under a tyrant who abolished private property. Today his people are starving. South Korea allowed individuals the freedom to exchange private property under laws that were the same for all. It is now one of the richest countries in the world. Haiti and the Dominican Republic share the island of Hispaniola, but they share little else. Property rights are dubious in Haiti and it ranks as the poorest nation in the western hemisphere. The Dominican Republic is what the World Bank calls an "upper-middle income developing country" with reasonably secure property rights. The average Dominican earns nearly ten times as much as the average Haitian. The list of twins goes on and includes the former West and East Germanies and Pakistan and India.
Palda explains that "When you take decisions out of peoples’ hands by regulating what norms a product must adhere to or limit a firm’s ability to find replacements for non-performing workers, or when you socialize health and education, you degrade the ability of people to do with their property, be it physical, or human, what they please. This is turn limits their ability to enter into mutually profitable exchanges and this thwarts the move towards Pareto-efficiency. When you set taxes too high you get a similar phenomenon. Taxes hide the connection between the efforts you make and the rewards you get from those efforts. In some European countries taxes are so high that people do no longer see why they should work in the legitimate market."
Apart from the loss of prosperity, the degradation of property rights through excessive taxes and regulations estranges people from each other because the incentive to work out at an individual level how differences about how resources should be resolved makes them strangers to the ideas of compromise and cooperation. Russians who immigrated to the US after the fall of the Soviet Union were surprised that parents donated time to organize child sports, and that dog owners picked up their pets’ droppings in the park. Europeans are similarly removed from the impulse to give charitably and donate their time.
"What you have in Europe is a lack of individual cooperation complemented by conflicts between groups in society orchestrated by political middlepersons. Using government to resolve issues of how to use property is the route to conflict because government by definition holds a monopoly on coercion and its sole function is to exercise that monopoly. I see signs in the present US budget imbalance and the move to socializing health care that the US is following the European model of centralized control of revenues and spending. In contrast, using private property rights to resolve how resources could be used leads to something I call the Peace of Pareto. That is my idea for Pareto’s Republic."
While Pareto-efficiency is a well-known concept, Palda’s book is the first to make it accessible to a broad audience. He shows just how fudamental it is to explaining where the economic and social fissures can be found in today’s societies and how they may be fixed. Pareto’s Republic is also a brief, but comprehensive, and comprehensible introduction to how economic and political thinking can be united under the banner of something called Public Choice Theory. At the basis of all of this lies the principle of Pareto-efficiency.