A book I just recently finished, After War: the Political Economy of Exporting Democracy, has a lot of insight into the institutional and behavioral theory behind reconstruction (e.g. the nation building in Iraq and Afghanistan). One of the explanations given by Coyne, the author, left me wanting to model his theory on underlying preferences in a society and their affect on choices of government.
Despite the US military’s successful toppling of the Hussein regime, the people of Iraq did not collectively rally to create liberal democratic institutions. Was it because they did not agree with basis of them? Yes and no, says Coyne. There are multiple reasons why Iraqis avoided liberal democratic institutions (the fear of a strong centralized government was one, for instance) and in turn it reflected the underlying preferences of society. Thus, while the occupation managed to change the options available to citizens (to vote, get an education, open a store), it does not guarantee that citizens will choose those options available.
Coyne thus suggests that societal preferences act as a large determinant of the success for a reconstruction effort. If the underlying preferences of society do not desire liberal democratic institutions, they will not occur. I felt that this could be modeled similarly to an income-consumption graph, the same type that determines the consumption preferences of a consumer who faces a limited budget and choice between two goods.
Assuming a utility maximizing consumer, only two equal priced goods, and a limited income, an individual will choose the outermost bundle possible with their income (the maximum amount of the two goods available, dependent on how much they value each good). In this scenario, depending on whether the consumer has budget constraint BC1 or BC2, they will attempt to purchase bundle A or B to get the most ‘bang for their buck.’
Now what I attempt to do is replace the goods chosen with social welfare and personal freedom on the Y and X axis respectively. Societal preferences now act as the ‘budget constraint’ in this model, and the indifference curve determines the type of government chosen by the society. Preferences can reflect trust, sense of equality, and tolerance of beliefs: all characteristics that become reflected in the type of government a country has.
In the model above, the society currently reflected has underlying preferences that do not support a liberal democracy. This could be reflective of 16th century England under the Tudor Dynasty. Even if a radical republican army were to invade and overthrow the crown, the reality is that the majority of society would not support a liberal democracy. Social and formal institutions at the time were dependent upon a strong monarchy, and the economy was oriented around the various monopolies controlled and regulated by the crown. Thus, the best this society can ‘purchase’ is a monarchal government at bundle A.
However, if there were to be a shift in underlying preferences, then the government bundle chosen can change. For instance, an endogenous change in the political climate (political revolution) can cause a major shift in preferences. This is exactly what happened after the Glorious Revolution in England where the monarchy was severely constrained by the Parliamentary system. Just as a consumer cannot buy a $5,000 computer unless they have the money, a country cannot just construct a government reflecting the preferences of an entirely different nation (such as the US attempted to do with Iraq).
In my abstraction, I attempt to use the basic income-consumption model to extend neoclassical theory into the realm of institutional analysis. This creates multiple caveats to my modeling for very obvious reasons, the largest being that it is very difficult to capture institutions within a model. Furthermore, I am not saying that personal freedom and social welfare are mutually exclusive, but just that there are limits to them contingent on the ‘amount’ of the other (e.g. whether you can kill your neighbor because you feel like it).
My model also assumes that the social costs of Personal Freedom and Social Equality are the same, but reality shows that this is not true. One must just imagine a small island society with very limited resources, and it becomes clear that tight social cooperation would be vital to survival. In this scenario, the relative price of personal freedom would be very high, and personal preferences would have to adjust, regardless if they supported the idea of extreme personal freedom.
Finally, I do not claim societal preferences are the only factor determining the type of government a nation has, but I do try to model how underlying preferences could determine what kind of government evolves in a society. A society that has a stronger sense of social welfare will have indifference curves reflecting that.
These are just some of the many caveats associated with my basic attempt to model economic theory as I have read it. I am sure that others have done this and in a much better and precise manner.