James Madison, Adam Smith, and The Narrow Corridor

invisible hand friedrich hayek james madison daron acemoglu james t. robinson the federalist

November 3, 2021

Why do some nations fail? What is necessary for nations to succeed?

In 2012, economist Daron Acemoglu and political scientist James T. Robinson wrote a book Why Nations Fail, The Origins of Power, Prosperity, and Poverty. They concluded that for a nation to succeed, it must provide a well-defined legal set of rules, an enforceable legal system with no restriction on the free flow of information. In 2019, these authors wrote a sequel, The Narrow Corridor, States, Societies, and the Fate of Liberty. In this book, they argue that liberty is the goal that rational people pursue—but in doing so, a society must find a balance between the needs of individuals and the needs of society. This balance, or what the authors call a “corridor” can be quite narrow, as demonstrated by the many nations that have recently moved away from liberal reform to freely-elected authoritarian governments. To many of us, this seems a surprise; but it should not be.

Consider this: when people are asked if they prefer liberty to slavery, the expected response is “I prefer liberty;” but what they say and what they do may be two different things. In recent years, nations that have experienced liberal reform have reversed themselves and have voluntarily elected authoritarian governments. By doing so, people are relinquishing their liberty. The political economist Friedrich A. Hayek warned in his classic 1944 The Road to Serfdom that liberty is too precious a gift to be so easily relinquished.

To most of us, relinquishing precious liberty seems irrational behavior; yet to the impatient seeking economic security and to the inexperienced having not lived under despotism, that decision may seem perfectly rational. In fact, studies show that many people accustomed to freedom take liberty for granted and are simply unaware when their liberties are initially taken away. Consistent apathy and complacency shown by low voting confirm this observation.

To retain liberty, the corridor must be maintained—but how is this accomplished? A bit of history is helpful. The balanced corridor is designed to curb excessive power of the private and public sectors. When we think of a way to balance power, we normally think of American Founding Father James Madison and his Federalist 10 which advocated the checks and balances of separation of administrative powers and separation of competing factional groups. Indeed, the checks and balances concept is designed to create the needed corridor. If I am correct, then it is surprising that Madison is given no credit in the Acemoglu and Robinson book.

Similarly, we rarely or never think of Scottish political economist Adam Smith in reference to the corridor concept or apply the term “checks and balances” when analyzing his works. However, Smith’s Theory of Moral Sentiments and the Wealth of Nations are powerful examples of how to balance private and public interests. Smith’s key to maintaining this balance of power is competition in the private sector and preventing the public sector in pursuit of correcting private market failures from driving out—accidentally or intentionally—the more efficient and equitable private sector. Historian William D. Grampp in Economic Liberalism, commenting on this topic says, ”… in order to maintain freedom, rivalry must be maintained…competition is the method of maintaining and also of controlling rivalry in both its economic and political aspects. The Federalist conception of political competition is analogous to the conception of economic competition in classical economics.” (1)

In this essay, I propose to show that the corridor concept was well developed by Madison and Smith. However, before I provide evidence of my assertion, let me provide a fuller description of the concept “narrow corridor.”

To gain and retain liberty, a nation must establish a corridor between the extreme harms of individualism and extreme overreaching statism. Traditional political economists call individualistic harms negative externalities and give such examples as pollution, unfair and inefficient monopolies, uncompensated benefits that are provided by others, and moral hazards. Public choice political economists argue that harms of over-reaching statism occurs when the gains of the peoples’ representatives outweigh the benefits of those being represented.

The authors use Lewis Carroll’s the “Red Queen Effect” in Through the Looking Glass to indicate how the corridor can be maintained. The Red Queen tells Alice she must run faster and faster just to stay in the same place. Carroll was drawing this tale from evolutionary biology that taught that to survive and grow species must adapt over time. The authors apply this metaphor to both society and the state. They must grow proportionately so neither one becomes too powerful. Charles Darwin expressed it this way, “it is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

To understand the danger of too much individualism and too much statism, we need a clear understanding of the terms democracy and republic—not what people think the terms mean, but what the Founding Fathers thought they meant when framing the Constitution. The American historian Joseph Ellis in his 2010 The Quartet provides that understanding,

The term democracy remained an epithet until the third decade of the nineteenth century. It meant mob rule, the manipulation of majority opinion ran counter to the long-run interests of the ‘public’.…In the 1780’s democracy meant refusal to pay taxes…The democratic society that Alexis de Tocqueville described in the 1830’s was still aborning in the 1780’s. The operative word for the revolutionary generation was republic rather than democracy. (2)

In his The Twilight of the Elites, Christopher Hayes provides further clarification of the Founding Fathers’ fear of democracy:

This desire for rule by the “natural aristocracy” is the other half of our peculiar ideological inheritance as Americans. For all we associate the revolution with a battle of democracy, of the four governing institutions the founders created…only one, the House, was directly elected. Senators were chosen by state legislatures, the President by the electoral college, and justices of the Supreme Court by the President (with the consent of the Senate). In Federalist 10, James Madison famously drew a distinction between a democracy and a republic, placing the entity created by the new constitution squarely in the latter camp.” (3)

Similarly, the Founding Fathers feared extreme statism ruled by untrustworthy elites. Why did they distrust the elites? The German sociologist Robert Michaels in his 1911 book On the Sociology of the Party System in Modern Democracy provides the answer. Christopher Hayes explains:

… were parties of the left, these most ideologically committed to democracy and participation, as oligarchic in their actual functioning as the self-consciously elitist and aristocratic parties on the right? Michaels grim conclusion was that it was impossible for any party, no matter its belief system, to bring about democracy on practice. Oligarchy was inevitable. (4)

Michaels calls this inevitable occurrence the “Iron Law of Oligarchy.” Today we use the phrase “principal-agent problem,” a situation whereby the agents—chosen to represent the principals lacking time or lazy and complacent—gain power and control of the principals whom they represent.

What were James Madison’s and Adam Smith’s contributions to the narrow corridor theory? Madison knew well, from the study of the Greek and Roman classics, that democracy could easily lead to mob rule, then unrepresentative elitist politicians like that of the French Revolution. In the Federalist 51 newsletter Madison wrote: “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” (5) Madison called groups of men with similar interests factions. In Federalist 10, Madison wrote, ”…a pure democracy , by which I mean a society consisting of a small number of citizens…can admit of no cure for the mischiefs of faction.” (6)

How then can the new constitution deal with the potential mischiefs of factions? Madison believed a republican rather than a democratic form of government was the solution to the problem of factional disputes. In Federalist 10 he writes:

The two great points of difference between a democracy and a republic are: first, the delegation of the government in the latter to a small number of citizens elected by the rest; secondly, the greater number of citizens and greater sphere of country over which the latter may be extended. (7)

At that time, his colleagues leaned heavily on the French philosopher Montesquieu, who did not believe that a republic was workable for large territories. Montesquieu wrote: “It is natural for a republic to have a small territory; otherwise, it cannot long subsist.” (8) Madison disagreed and argued just the opposite, that republics were precisely what was needed for a large territory like America. A republic could properly accommodate large nations with a multitude of factions competing against one another. In his judgment, the competing factions would retain the balance of power, because the more competition the better and, therefore, the greater the probability that harms would be mitigated.

Not all agreed with Madison that competing interests amongst factions would act as checks and balances keeping liberty secure. Historian Thomas Ricks quotes a letter from Abigail Adams to a friend saying: “self-interest is more powerfull than publick virtue” and Ben Franklin’s observation that “sordid self-interest… the natural Produce of base Minds”. (9) According to Ricks, Madison warned his colleagues not to waste energies fighting party and faction. Specifically, Madison said: “The causes of faction cannot be removed…relief is only to be sought in the means of controlling its effects’. (10) In other words, Madison knew that protection of liberty could not alone be dependent on individuals, but that for liberty to exist, both the rights of individuals and the rights of society had to be protected; that is, the state must be restrained—or using Acemoglu and Robinson’s term ‘shackled’—so neither becomes more powerful than the other. Using political science language, the corridor must be designed to include as many perspectives as possible—called intrusion—rather than to exclude the many different points of view—called extraction.

This brings us to Adam Smith. Did Smith believe in the “narrow corridor” theory and did Madison read Smith? Most historians believe that the Founding Fathers were well versed with Smith’s 1759 The Theory of Moral Sentiments and his 1776 Wealth of Nations. The former book emphasized the compassion and concern that people have for their fellow man and the latter book explained how man’s concern for self can result in benefits to his fellow men. Smith recognized that the free enterprise system was not perfect, but that even when people were focusing primarily on themselves, the market system worked unintentionally by an “invisible hand” to benefit society at large. The typical quotes offered for Smith’s “invisible hand” in The Wealth of Nations are:

Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only… (11)

and

Every individual neither intends to promote the public interest, nor know how much he is promoting it …He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…By pursuing his own interest he frequently promote that of the society more effectually than when he really intends to promote it. (12)

Three examples of the invisible hand might be: (1) what economists call “consumer and producer surplus,” whereby through the interaction of supply and demand, prices are forced down so that consumers can purchase at prices below what they would normally be willing to pay and producers can sell at prices below what they would normally be willingly to charge; (2) new knowledge acquired by consumers or producers can be transferred to others without cost; and (3) new technology and/or technological improvements that significantly reduce prices convert what used to be luxury goods now attainable by people at most income levels.

Because we are accustomed to Smith being cautious about government intrusion, we forget about Smith’s arguments against mercantilist tariffs and his support of free trade. In The Mind and the Market, historian Jerry Muller writes, “But he (Smith) thought that the size and functions of the state would actually grow the development of commercial society. …the benefits of a commercial society required a larger state, but the wealth generated by a well-functioning market economy would make the economic burden of the state bearable.” (13)

Smith starts with economics and proceeds to politics. Madison starts with politics and proceeds to economics. For Madison and Smith, a healthy political and economic system cannot exist without a corridor to protect liberty. For both Madison and Smith, liberty is at the heart of the political system and the rule of law is clear and enforceable. In the field of economic growth and foreign aid, this is precisely what institutional economists like Douglass North have been preaching for decades. (14)

According to Madison, a republic—unlike a democracy—is based on representation, but a properly developed republic will have a workable representation. This workable representation will be designed to provide the most symmetric information and the least conflict between the private interests of the citizens and the public interests of the representatives. Public choice economists would say that this design minimizes the principal agent problem.

Can a corridor be kept wide enough to protect liberty? In 1973, historian Arthur Schlesinger Jr. wrote a popular book called The Imperial Presidency. Schlesinger cited many historical examples of what he called presidential overreach or extra constitutionality. Historian Jeffrey Rosen puts this topic in perspective:

During the election of 1912, the Progressive candidate Theodore Roosevelt, articulated a populist defense of virtually unchecked executive power, declaring that the president is ‘steward of the people’ (Kansas speech August 1910) who can do anything the Constitution does not explicitly forbid. (15)

The Republican incumbent William Howard Taft took the opposite position, that the president can do only what Article II of the Constitution explicitly authorizes. At that time, the framers of the Constitution sided with Taft creating a president, according to Rosen, “stronger than a state governor, but much weaker than the hated tyrant King George III.” Nevertheless, Rosen writes, “…all presidents since FDR have accepted some version of TR’s vision of the presidency.” (16)

How have other branches of government reacted to what Schlesinger called presidential overreach or extra constitutionality? According to Rosen, expansion of executive power—except in a few situations like the Supreme Court’s rejection of Truman’s seizure of the steel mills, the rejection of Nixon’s attempt to block the seizure of the Watergate tapes and after 9/11, blocking George W Bush’s attempt to designate some citizens and non-citizens as enemy combatants—expansion of presidential powers consistently expanded. Obama promised to roll back many of the executive orders of President Bush, but Obama ended his administration with more executive orders. Can presidential powers be curbed and as Acemoglu/Robinson’s corridor be expanded? Jeffery Rosen on December 17, 2016 write:,

Over the past century, presidential power has grown enormously in both foreign and domestic affairs. The only real check has occurred when the people themselves say they have had enough—protesting in the streets, reshaping the parties and throwing the rascals out. In the end, only the American people, exercising their rights of speech, voting and association, can rein in a presidency that congressional Democrats and Republicans alike have allowed to grow far beyond the original bounds of the Constitution. (17 )

How does Acemoglu and Robinson’s “narrow corridor” propose to create or retain the liberal model? To develop their solutions, they use the free-market economist Frederick Hayek as their strawman. As indicated, Hayek’s Road to Serfdom was a warning against relinquishing liberty and becoming a slave to despotism. Hayek believed the government should only be as intrusive as necessary to protect individual liberties. The authors believe Hayek’s fears of government becoming too large and too intrusive have been unwarranted for, at least, two reasons. First, Hayek does not recognize the Red Queen Effect, i.e., Hayek assumes a nation will stabilize in a zero-sum situation with little or no effective economic growth and second, that the minimal assistance recommended by Hayek is simply far too small to be effective. The authors, in my judgment, are unfair to Hayek. Yes, he recommended caution against overly intrusive government, but he certainly recommended government assistance when needed to protect citizen’s welfare.

The authors recommend the Swedish or other Scandinavian socialist models. In their judgment, these models, “…create not just a more interventionalist, redistributive state but doing so under the auspices of a coalition including businesses and the great majority of workers organized in politically active trade unions which imposed tight shackles on the state.” (19 )

Based on the Swedish model, the authors recommend a workable business government coalition model, what economists call industrial policy or corporatism and government encouragement of unionization. (20) The authors then make the assertion that “ …the state should intervene only when the benefits from intervention are larger than the political costs of intervention.” (20) But who determines the criteria for this cost-benefit analysis? The authors advocate the Swedish corporatist model that controls prices, rather than relying too heavily on taxes for inequality redistribution. Other than the Swedish example, the authors conclude on this topic that: “With the fiscal role of the state diminished, keeping the state in check became a more feasible objective.” (21).

The authors believe the corridor of liberty to exist must not be dominated by inequality, unemployment, low productivity and income growth, and lack of trust in protective institutions. They argue, as many others do, that these harms have been caused by globalization and technology and, more controversially, they believe income and wealth inequality has increased because of inadequate Wall Street regulation. Nevertheless, they do not provide specific solutions to these problems except to offer generalizations about having the Federal government transfer some of their decision-making responsibilities to the states, increasing social services, greater regulation of business, “redirecting technology” and finally, adhering to rights established by international organizations.

To conclude, preventing excessive individualism and statism, i.e., minimizing the principal agent problem, is certainly key for nations to gain and retain liberty and freedom. The authors provide excellent examples of nations that have succeeded and failed to attain and/or retain the needed corridor. The concluding chapter of their book provides many generalizations for success that can be used for academic and policy analysis. The Narrow Corridor should be required reading for policymakers.

Related Links
Shanon FitzGerald, Adam Smith in the Narrow Corridor
Acemoglu on Why Nations Fail, an EconTalk podcast, March 19, 2012
Benny Carlson, More or Less Economic Planning? Enduring Arguments from Sweden, at Econlib, October 2020

References

Grampp p.122
Ellis p. xviii
Hayes p.43
Hayes p.57
Federalist 51 p. 322
Federalist 10 p. 81
Federalist 10 p. 82
Ricks p.194
Ricks p.89
Ricks p. 207
Smith’s Wealth of Nations I,ii p.26-27
Smith’s Wealth of Nations IV.ii p. 456
Muller, The Mind of the Market, p.
Bethell, p. 28
Rosen, C2
Rosen, C2
Rosen, C2
Luhnow and Cordoba, C1
Acemoglu and Robinson, Narrow Corridor p.473
Acemoglu and Robinson, Narrow Corridor p. 476

BIBLIOGRAPHY

Acemoglu, Daron and Robinson, James A. Why Nations Fail. Crown Publishing Group: New York, 2012.

Acemoglu, Daron and Robinson, James T. The Narrow Corridor, States: Societies, and the Fate of Liberty. Penguin Press: New York, 2019.

Bethell, Tom. The Noblest Triumph: Property and Prosperity Through the Ages. St Martin’s Press: New York, 1998.

Grampp, William. Economic Liberalism, Volumes I and II. Random House: New York, 1965.

Hamilton, Alexander, John Jay, and James Madison. The Federalist Papers (A Mentor Book). New York: 1961; New York, 2012.

Hayes, Christopher. Twilight of the Elites. Broadway Paperback: New York, 2012.

Luhnow, David and Jose de Cordoba. Is Mexico’s President a Threat to It’s Democracy? The Wall Street Journal, June 5-6, 2021.

Muller, Jerry Z. Adam Smith in His Time and Ours. The Free Press: New York, 1993.

Muller, Jerry Z. The Mind and the Market, Capitalism in Modern European Thought. Alfred A. Knopf: New York, 2002.

Ricks, Thomas E. First Principles. Harper Collins: New York, 2020.

Rosen, Jeffrey, “The Over-Inflated Presidency.” The Wall Street Journal, December 17-18, 2016.

Smith, Adam. An Inquiry Into The Nature and Causes of the Wealth of Nations, Vol. I. Liberty Fund: Oxford University Press, 1976.