The Aristotle Tradeoff: the Foundations of Wealth-enhancing Democracy in Ancient Greece

Abstract: In this paper, we outline what we term the “Aristotle tradeoff:” legislated homogeneity in asset ownership (which is costly because it reduces gains from specialization yet beneficial in that it yields better alignment among voters) versus market-driven asset ownership (which generates gains from specialization but yields inferior majoritarian decision-making). In the presence of the tradeoff, the optimal institutional design delivers a second-best result. The ancient Greeks, who designed the first successful democracies and influenced those that followed, understood this tradeoff and, we argue, succeeded because they acted on that understanding. We pursue this argument in a discussion of the political institutions of two of ancient Greece’s most successful city-states (poleis), Athens and Sparta, who responded to the tradeoff in fundamentally different fashions. The discussion illustrates that successful democratic decision making depends on the way voter incentives are affected by the ownership of assets whose value depends on policy decisions. Modern democracies ignore this lesson at their peril.