A Hypothesis of the Natural Rate of Punishment

Abstract

One of the most puzzling questions in economics is the existence of extremely high income differences between rich and poor countries. In neoclassical economics, we choose to start with the first order assumption, that people and institutions are rational, meaning that capital flow from places with low return to higher returns. This doesn’t mean that all countries should be alike, but any differences in income could only reflect a level effect from different institutional set-ups, because of the economic law of diminishing return. There cannot be any dynamic growth effect from differences in institutions. This was one of the main insights from the classical Solow model, which in turn lead to the conclusion that institutions was important, but actually not that important. In this paper I challenge this mainstream view. My hypothesis is that maybe our institutions actually have some “secrets” as Hayek once put it. Maybe small initial changes in those institutions could eventually lead to success or totally disaster, simply because the time preferences in the economy in it selves is not an exogenous variable. My suggestion is that the initial condition for man, is “stealing” from the capital base (which we normally call a “crime”) which in turn is actually a dominant strategy. Institutions securing private property are very fragile, meaning that a certain degree of punishment, breaking these institutions, must be in place, before any growth take-off. From an individual point of view, there seems to be a clear trade-off between generating income from productive work and stealing from the capital base (“from the rich”). It seems therefore logical to think that the punishment from breaking the institutions of private property must somehow reflect the overall accumulation of capital, meaning there could be a abstract or natural level of punishment, securing doing crime becomes relatively “bad business.” But if punishment is lower than the “natural level” crime, crime in itself could deteriorating the capital base, leading to lower income and then give birth to even more crime. This asks the question. If the capital base is lower, shouldn't that generate a higher and higher return of capital at the margin, then simply establish a new equilibrium at a lower income level? I will show that it is possible that the destructive forces from crime is enough to overcome the forces from the Inada condition, then established a negative growth path and the destruction of society.