Engineering Wealth-Enhancing Democracy in Ancient Greece: Gains from Exchange versus Alignment on Public Policy

Abstract

This paper analyzes a tradeoff articulated in Aristotle’s recommendations for successful democracy: Restricting market exchange may help align voters’ incentives and thereby improve the quality of collective decisions, but at the same time reduces the gains from specialization and trade. We term this “the Aristotle tradeoff.” The Aristotle tradeoff implies that the best feasible policy will generally be a “second-best” result of balancing the benefits from maintaining the majority’s support for socially desirable collective decisions against the costs of foregoing gains from specialization and trade (and vice versa). We use the tradeoff to explore the institutions of the famously democratic Greek poleis, many of which responded in differing ways, as their particular circumstances dictated. We finish with a discussion of implications for the modern world.