The Foundations of Wealth-enhancing Majority Rule: Lessons from Institutional Design and Redesign in Ancient Greece

Abstract: As far back as ancient Greece, scholars have recognized that majority rule can produce socially undesirable outcomes. In recent years, even as research has shown that the “good institutions” bundle includes democracy – good places to live are generally democratic – there has been growing attention paid to the potentially negative (as well as positive) effects of democracy on economic development. In this paper, we examine the circumstances under which majority rule will promote, rather than impede, wealth-creation. We develop a model (inspired by Aristotle) that illustrates the importance of matching political institutions to economic circumstances, so that when citizens vote on the basis of what they stand individually to gain or lose from a policy decision, they will vote as if they are seeking to maximize net social benefits. We then use the model to guide our analysis of two pioneering majority-rule systems – those of Athens and Sparta. Athenians and Spartans went to great lengths to design institutions that kept voters’ incentives aligned; moreover, they redesigned their institutions in response to changes in the nature of their opportunities for wealth creation. We also discuss lessons for the modern world.