The quest for a world government

The fundamental conflict between globalization and democracy has often been discussed. It has led to two quite different, and in many respects even opposite, reactions:

1. ‘Idealists’ resurrect the perennial dream of a world government committed to the rule of law, human rights and democratic procedures (see Archibugi et al. and Marchetti, both this volume). Many see the United Nations (UN) as the preliminary form of such a world government and are prepared to take its well-known limitations as a transitory phase that will be overcome with time.

2. ‘Market believers’ rely on the global market to essentially solve all problems, provided governments do not interfere. They generally admit the necessity of having some rules to the game (such as a guarantee of property rights) but they believe that such rules emerge endogenously as a result of international competition.

Both reactions are seriously lacking. The notion of a world government tries to superimpose a power structure on existing national government. It naively presumes that a world government would act out of global interest. However, even a representative democratic world government could not provide true democratic governance, but would exhibit pervasive government failure due to its large distance from the citizens and its monopoly power (see also the similar criticisms by Christiano, this volume). At best, such a ‘world’ government is the apex of the dominant world power (today the United States), which certainly does not meet the ideal of an institution fairly and equitably serving the interests of mankind.

Introduction

The basic distinction made in this volume compares “economic value,” expressed in monetary terms, to “cultural value,” reflecting cultural, aesthetic, and artistic significance. This chapter makes a different distinction that is rarely made explicit but that is of central importance to the decision process in cultural policy. On the one hand, “value” is attached to the economic effects of cultural activities: When cultural values are created, economic activity is bolstered. The increase of commercial activities induced is measured by the so-called impact effect. On the other hand, the value of culture is reflected in the increased utility to consumers and nonconsumers of a particular cultural activity. This type of value is measured by “willingness-to-pay studies.” I argue that these two values dominate cultural policy, but they capture totally different aspects and are proffered by different kinds of communities.

People involved in the arts as administrators or entrepreneurs – they are referred to as arts people in this chapter – are fond of impact studies. These studies measure the economic effects of a particular artistic activity such as that of a museum or festival. In contrast, people trained in economics and applying it to the arts – they are referred to as arts economists in this chapter – are fond of willingness-to-pay studies measuring the external effects, that is, those welfare-increasing effects of artistic activities not captured by the market. These preferences are rather surprising. Arts people focus more on the economic effects of the arts than economists do.

The Goal of the Project

The goal of the Copenhagen Consensus project was to set priorities among a series of proposals for confronting ten great global challenges. These challenges, selected from a wider set of issues identified by the United Nations, were: climate change; communicable diseases; conflicts and arms proliferation; access to education; financial instability; governance and corruption; malnutrition and hunger; migration; sanitation and access to clean water; and subsidies and trade barriers.

A panel of economic experts, comprising eight of the world's most distinguished economists, was invited to consider these issues. The members were Jagdish N. Bhagwati of Columbia University, Robert S. Fogel of the University of Chicago (Nobel Laureate), Bruno S. Frey of the University of Zurich, Justin Yifu Lin of Peking University, Douglass C. North of Washington University in St Louis (Nobel Laureate), Thomas Schelling of the University of Maryland, Vernon L. Smith of George Mason University (Nobel Laureate) and Nancy Stokey of the University of Chicago.

The panel was asked to address the ten challenge areas and to answer the question: ‘What would be the best ways of advancing global welfare, and particularly the welfare of developing countries, supposing that an additional $50 bn of resources were at governments' disposal?' Ten challenge papers (chapters 1–10 in this volume), commissioned from acknowledged authorities in each area of policy, set out more than thirty proposals for the panel's consideration. During the conference, the panel examined these proposals in detail.

Introduction

Variable pay for performance may undermine employees’ efforts: Rewards crowd out intrinsic motivation under identified conditions. A bonus system then makes employees lose interest in the immediate goal. Moreover, monetary incentives in complex and novel tasks tend to produce stereotyped repetition, and measurement is often dysfunctional. Therefore intrinsic motivation is crucial for these tasks. However, for some work extrinsic incentives are sufficient. We offer a framework of how managers can achieve the right balance between intrinsic and extrinsic motivation.

Variable pay for performance and motivation

Variable pay for performance has become a fashionable proposal over recent years in private companies as well as in the public sector. Many firms have given up fixed salaries and have adopted performance-related pay. Firms try to match payment to objectively evaluated performance. It is reflected in such popular concepts as stock options for managers and various types of bonuses. In the public sector, efforts to raise productivity in the wake of New Public Management have also resulted in attempts to variably adjust the compensation of public employees to their performance. This means that firms and public administrations increasingly rely on price incentives, i. e. on extrinsic motivations.

We argue in this contribution that variable pay for performance under certain conditions has severe limits. In situations of incomplete contracts – and these dominate work relationships – an incentive system based only on monetary compensation of work is insufficient to bring forth the performance required. In many situations monetary incentives even reduce performance. Work valued by the employee for its own sake or by fulfilling personal or social norms is often indispensable. These values or norms may be undermined or even destroyed by offering monetary incentives.

Beyond Traditional Federalism

The economic theory of federalism yields one clear and overriding result: a federal (i.e., decentralized) state is superior to a centralized one in the sense that it fulfills the demands of the citizens more effectively. A federal constitution that endows the federal units (provinces, Länder, states, cantons, or communes) with sufficient decision-making rights and taxing power has three major advantages over a unitary state:

Advantage 1: More Flexible Politics. In all societies, citizens differ widely in their demand for services provided by the state. These differences in demand are not only the result of heterogeneous tastes due to differences in tradition, culture, language, and so on, but also of unequal economic conditions. The latter are caused by, for example, leads or lags in the general business cycle and, of course, special structural conditions such as differences in infrastructure, unemployment, the concentration of particular industries etc. These differences in the demand for public services must be met by differentiated supply policies if citizens' preferences are to be fulfilled. Federal sub-units are best able to meet this challenge. The politicians in charge are better endowed with information about the local requirements. They have the incentives to provide these services according to the preferences of the citizens because they are directly accountable for the local policy and their reelection depends on the satisfaction of the voters they represent.