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Interview with Gottfried von Haberler
The Austrian Economics Newsletter

Spring 2000
Volume 20, Number 1

Gottfried von Haberler

Between Mises and Keynes

An Interview with Gottfried von Haberler (1900-1995)

Taught by Fredrich von Wieser and Ludwig von Mises, and later a professor at Vienna, Gottfried Haberler worked within the milieu of the Austrian School but departed from the theory in important respects. In 1936, Haberler came to Harvard where he exercised a great deal of influence over the American profession.

Haberler's two major works–Theory of International Trade (1936) and Prosperity and Depression (1937)–drew together scattered ideas into a single theoretical treatment. His work on international trade theory placed the theory of comparative advantage within the framework of opportunity cost rather than real cost. His work on business cycles criticized both the Keynesian and Misesian theory. His last article was written for the Austrian Economics Newsletter (Winter 1995).

This interview, never before published, was conducted January 3, 1979, by Richard Ebeling, now Ludwig von Mises Professor of Economics, Hillsdale College, Hillsdale, Michigan, and by Joseph T. Salerno, now professor of economics at the Lubin School of Business at Pace University in New York.

AEN: Professor Haberler, what first sparked your interest in economics?

HABERLER: I must say it was practically by chance. When I entered the university in 1918 they introduced a new degree. Formerly, economics was taught in the faculty of law. I took a law degree, but later on and for practical reasons. But they introduced a new degree for social sciences, Staatswissenchaften, and I got interested in it without really knowing quite what it was.

AEN: With whom did you study while at Vienna?

HABERLER: Oh, in Vienna, primarily with Ludwig von Mises. He was not a tenured professor, as you know. He had the title of professor and was an honorary lecturer Privatdozent, as it was called. But he also had his famous seminar which has been mentioned in the literature, his Privatseminar. Friedrich von Wieser was my first professor, in the sense that I took his course at the univesrity, a big lecture course for hundreds of students. He was a very distinguished gentleman and a fine lecturer. Hayek knew him very well and also studied with him. Later on I studied with Hans Mayer. There were some others; there was Richard von Strigl; he was a little older than me and was part of the next generation after Wieser and Mayer. My closest friends were Fritz Machlup, Hayek, and Oskar Morgenstern. Morgenstern, Hayek and I later became lecturers, Privatdozent, and we had a joint seminar after we took our degrees.

AEN: How did you originally meet Professor Hayek?

HABERLER: Oh, I met him in the university. He was a year ahead of me, but we met regularly in Mises's private seminar, which was held every other Friday, and that went on for years and years. Mises also taught in the University and gave a course there. It was there that we met for the first time. Hayek was in fact closer to Mises than myself. But, in the end, we were all together in the Mises-Kreis [the Mises-Circle]. Morgenstern and Machlup were of course members of the seminar as well.

AEN: How did you find Professor Mises as an instructor?

HABERLER: He was excellent; first class. Both in the university where he was very popular and then in his famous private seminar.

AEN: What kind of topics were discussed in his private seminar?

HABERLER: Everything. Monetary theory, of course, but also a lot of time was spent on methodology. Yes, methodological problems and the sociology of Max Weber, that struck a cord in our minds. It was very much the a type of methodological subjectivism. And I have noticed that Ludwig Lachmann mentions that he also got interested in Weber. The sociology and philosophy of Weber was discussed very much. And in Mises' seminar, there were not only economists but lawyers, and philosophers, such as Felix Kaufmann. By the way, he was a versifier. One of his poems is reprinted in a Mt. Pelerin publication in 1961 honoring Mises's 80th birthday. It was a very nice little poem about Mises's private seminar. Unfortunately, it was never translated. Kaufmann was a philosopher, but he was also interested in economics. So the group was a mix of people interested in philosophy, economics and sociology.

AEN: What kinds of contributions did those seminar participants make, for example, Strigl or Ewald Schams or Paul N. Rosenstein-Rodan?

HABERLER: Schams was a mathematical economist, and a bridge to the Lausanne School. Rosenstein-Rodan also was interested in mathematical economics and the Paretian School, i.e., general equilibrium economics. We all got along very well. There was no such sharp division between Austrian economics and mathematical economics.

AEN: I understand that Professor Strigl also make contributions in both methodology and trade cycle theory.

HABERLER: Yes, he wrote a book called Economic Categories. I believe the title in German is Die Okonomischen Katagorien und die Organisation der Wirtschaft. Most of the people there had practical positions. Mises, of course, was a secretary of the Chamber of Commerce. Strigl was also in some government office. I, too, was in the Chamber of Commerce for years. Mises had gotten me a job there, first in the library and later I was engaged in trade policy problems. Hayek had a job in the Chamber of Commerce building, though not with the Chamber itself. Hayek's job was in an office engaged in settling prewar liabilities and assets. Mises and Hayek worked together there. There were several other people who also had jobs. You may have heard the name Helene Lieser, though she didn't write very much; she had a job in the Austrian Association of Bankers. Morgenstern later joined Hayek in the Institute for Business Cycle Research--the Austrian Institut fur Konjunkturforschung, as it was called. Now it is called the Institute for Economic Research. It was one of the first business cycle institutes in central Europe.

AEN: What motivated Mises and Hayek to found the institute in 1926?

HABERLER: Well, Mises had developed his theory of the business cycle and Hayek's first publications were in that area. Hayek published his theory of the business cycle in 1931 in his book,Prices and Production. Hayek had based it on the earlier writings of Mises, Knut Wicksell and Eugen von Böhm-Bawerk. At first, I was very much interested in the approach but then I moved away from it; I am now closer to the Chicago School than to the Austrian School.

AEN: What led you question the relevance of Hayekian business cycle theory?

HABERLER: I realized that you can't explain a deep depression by real maladjustments emphasized by Mises and Hayek. It was the so-called "secondary deflation" which made the Great Depression so bad, and not any enormous real maladjustments. I think Hayek would agree with that now. You may remember that we published at AEI a little pamphlet, A Discussion with Friedrich von Hayek (1975), where I tried to get him to admit that it was the secondary deflation which made the Great Depression such a disaster rather than large real maladjustments, and I think Hayek would now agree with that. He said it in so many words in that publication.

AEN: Did Wilhem R?pke have any influence in this respect?

HABERLER: R?pke was not, of course, a member of Mises-Kreis, but we all knew him and later on I saw him a great deal after I moved to Geneva. He came occasionally to Vienna. He was close to us as far as free-market policy was concerned, but on understanding the secondary deflation, he was ahead of the Austrians. Also, Albert Hahn, a German banker, was a personal friend of Mises's and a personal friend of us all. Hahn and R?pke stressed the secondary deflation, and I think they were right. Their ideas were formulated independently of the Chicago School, which came much later.

AEN: Do you think, though, that the Mises-Hayek analysis has relevance at least in explaining the primary distortions?

HABERLER: Well, that may be so, but the particular type of maladjustment that Hayek has in mind, I believe, is not really a very important factor - what he calls the "vertical" maladjustments in the structure of production. What impresses me is that on other occasions our economy handles very large maladjustments, as, for example, during a transitions from war to peace and from peace to war, without much trouble. But in Hayek's theory those so-called vertical maladjustments are supposed to bring about the enormous disaster of the Great Depression. To my mind, that makes no sense.

AEN: The focus of both Mises's and Hayek's approaches was on the non-neutrality of money. The way money is injected into the economic system tends to effect the structure of relative prices and, by affecting relative prices, tends to influence the allocation of resources along alternative productive uses.

HABERLER: Yes, there certainly is something in that. If you inject the money into the economy one place rather than another it makes a difference. The monetarists try to handle that problem by saying that in the second and third rounds of spending, say, after a year or so, it doesn't make too much difference where the new money had been injected. I have an open mind on this question, but on the whole, I tend to agree with the monetarists that it really doesn't make too much difference. But it does make some difference.

AEN: What do you think originally accounted for the wide popularity of Hayek's theory at first, and then for a decline of interest in it?

HABERLER: Well, there was the Great Depression, and Hayek said he had an explanation for it. Later on, of course, it was overshadowed by the rise of Keynesianism. And John Maynard Keynes in some sense was right, namely, that once you had a deep depression a purely monetary policy to prevent a further deflation is not enough. Milton Friedman himself says there is such a thing as a cumulative process.

I like to quote that from the very end of his Monetary History of the United States. He makes the point that the rock which starts the landslide can be easily held back, but once the landslide is underway, you need a stronger force. I would apply that to the Keynesian policies in the Great Depression. Once it has become cumulative then easy money, even a zero rate of interest, doesn't help very quickly. Particularly if a deflation has been going on and prices have been falling, you would need to have a negative rate of interest, and that, of course, is not possible.

Therefore, in such a situation, I think Keynes was right. Injecting money directly into the income stream by a budget deficit was required to stop the landslide. I think this argument applies against the monetarists, as well as against Mises and Hayek. Terrace Hutchison, in his pamphlet Keynes versus the Keynesians (1977), published by the Institute of Economic Affairs, makes the point that Hayek, Lionel Robbins, Arnold Plant, and T. E. Gregory wrote a famous letter that appeared in the London Times on October 19, 1932, in which they rejected deficit spending. That I think was a great mistake, as Robbins later acknowledged.

I don't know what Hayek would say if you asked him now. Maybe he would admit it, too. In any case, the letter was very damaging and was probably responsible to some extent for the success of Keynesian theory. In that particular situation the Keynesian prescription made sense that what was needed was large deficit spending. But the mistake the Keynesians now make is that they go on speaking as if they still lived in a Keynesian world with mass unemployment, where you can spend without raising prices. That, of course, is nonsense. That is the weakness of the present Keynesian school, that they still think they are living in a deep depression, which is simply not true. Right now, we are very close to full employment, despite an unemployment rate of six percent.

AEN: If there had not been wage rigidities during the Great Depression, would you still have recommended that an active fiscal policy was needed to get us out, or could the market have adjusted on its own?

HABERLER: I recommend deficit spending only in a big depression and not in a mild recession. In a mild recession, of course, we have the "automatic stabilizers." You need not go out of your way in a mild recession to create a government budget deficit. It comes about all by itself through the existence of a large public sector, so there is really not much need to reduce taxes. Taxes, of course, should be reduced, they are altogether too high in general. But as an anti-cyclical device, I think, manipulating the tax rate is not necessary unless you get into a really bad recession. And the last recession, our recession of 1973-75, was, of course, a recession and not a depression in the sense of the Great Depression or earlier depressions. It was a mild affair.

AEN: One of the analytical methods that the Keynesians use is emphasis on aggregates, i.e., looking at the general wage and the general price levels. I understand that in the late 1920s you wrote a book on index numbers, Der Sinn der Indexzahlen (The Meaning of Index Numbers). What was the essence of your argument in that book?

HABERLER: Well, that was a technical book on index numbers, and I tried to link up the index number problem with general economic theory, but it did not have much on the particular problem to which you are referring. Now, I hear that Keynesians are criticized for using aggregates. I think that everybody uses aggregates.

Of course, you can overdo it. You can make the aggregates too large, but the economy is simply too complicated to go all the way down in a practical way to the last minute microeconomic distinctions. So I think that criticism of the aggregate approach has been overdone. It is a matter of degree and not either-or. But if you ask me, the weakness of Keynesian theory is that they overlook or have never learned to distinguish between the money rate of interest and the real rate of interest. That of course goes back to Irving Fisher. Probably you can trace it back further if you look. But we in Austria were always aware of that distinction.

I did mention in my book on index numbers that it is possible that the price level changes differently for different classes of goods and consumers, but here you have the practical problem that you cannot easily handle such fine distinction. You would not, however want to say that index numbers are useless because you would need an infinite number of index numbers to incorporate all the microeconomic distinctions. That I definitely did not mean to say in my book.

AEN: You mentioned that you thought there was some truth to the Keynesian argument in a deep depression. What were your first impressions of the General Theory?

HABERLER: Well, I never wrote a review of the book, but in the second edition of my Prosperity and Depression, I added a chapter on Keynesian theory. The first edition only made reference to Keynes's book in footnotes because the General Theory appeared when my book was almost finished.

I was impressed on the whole, but I criticized the multiplier theory and called it, as Keynes puts it, a tautological theory and not very useful. He didn't distinguish between the instantaneous multiplier and the serial multiplier. There were mistakes of that sort, but still it was a very stimulating book. Now, I remember Hayek criticized Keynes's Treatise on Money, published in 1930. I don’t remember if he wrote a criticism of the General Theory, but I think Hayek's review criticizing Treatise was very good. He had a published exchange of views at the time with Keynes. But personally they were on good terms. Hayek knew Keynes quite well, and they often talked to each other. Keynes said some very nice things about the Hayek's Road to Serfdom. And in one instance Keynes said that Hayek's argument in The Road to Serfdom was good medicine, but a bad diet.

AEN: Did you ever have the opportunity to meet Lord Keynes?

HABERLER: Oh, yes, very much so. He invited me to Cambridge for a month in 1932. I was his guest in Kings College and I talked in his famous seminar where no blackboard was permitted.

AEN: They say that he had a very charismatic personality. Did you find that to be the case?

HABERLER: Oh, he was a most interesting man and an excellent speaker, very quick, and so on. Charismatic? I don't know whether that is the right word. He didn't impress me in that way, but he certainly impressed his followers in that manner.

AEN: One of the major criticisms you made of Keynes's book in Prosperity and Depression was what later became known as the Pigou Effect. What drew your attention to this internal problem with his system?

HABERLER: It was not Arthur C.Pigou who drew my attention to it; I came across Pigou's argument only later. It made simply no sense to me to say that, if wages and prices were perfectly flexible, they could go down indefinitely with nothing happening to money. It seemed to me that the quantity of money in real terms would rise indefinitely and that this would bring about reflation; Keynes overlooked this.

But what I would stress more now, in an inflationary situation, is what I said earlier about the distinction between the real rate and the money rate of interest. This has never been incorporated into Keynesian theory, and even now Keynesians overlook it when they say the interest rate is very high. Nevertheless, when you look at the inflation rate, you see that the real interest rate is very low. This is a basic mistake that they made.

AEN: Did Keynes ever comment to you about your criticisms?

HABERLER: No, he did not.

AEN: If one goes through the reviews that were initially written of the General Theory, most were either critical or skeptical of various parts of his approach, yet within a short time a great many in the economics profession accepted Keynes's general argument. What accounts for this?

HABERLER: Well, that it was a "general theory" presented in manageable terms, by which I mean in terms of large aggregates. Keynes's theory easily lended itself to diagrammatic, mathematical and econometric treatment; at the same time Simon Kuznets developed the national income accounts approach and these two develops were soon merged together.

AEN: What do you think of the reinterpretation of Keynes offered by Robert Clower and Axel Leijonhufvud?

HABERLER: Well, in one sense I think they are right, for Keynes himself would not be a Keynesian today. You may remember Hayek reporting that in his last days Keynes had said that, yes, his followers had gone too far, but that he would turn around public opinion. He realized that in the new inflationary situation, his prescriptions were no good. Clower and Leijonhufvud tried to make allowance for that and to interpret the original Keynesian theory in the light of the new situation where the old prescriptions don't work.

It happens very often, you know, that the founder of a school finds himself in conflict with his followers. Marx wrote to Engels on one occasion that he, Marx, was I am not a Marxist! Keynes came close to saying that in his posthumous article on “The Balance of Payments of the United States (Economic Journal, June 1946). He spoke of some of the prescriptions of his followers as modernistic stuff gone silly and sour. That type of comment was aimed at Richard Kahn, and I sometimes feel that we should have Leijonhufvud write an article on Friedmanian Economics and the Economics of Friedman, because the rational expectations people also go a little bit too far. Friedman does not go that far. He is much more reasonable than the rational expectations people, so there is a similar type of conflict arising between the founder of this school and some of his extreme followers.

AEN: What so you see as the fundamental problem with the rational Expectations literature?

HABERLER: Oh, they go much too far. They are saying, for instance, that monetary policy cannot have any effect because people immediately anticipate it; that, when they read in the paper that the money supply has gone up, everyone concludes that the price level is going up, and everyone takes immediate actions which make the effect nugatory. So they, in effect, assume that everybody is an accomplished econometrician, and a one hundred percent monetarist, which I think is simply not so.

AEN: In his reinterpretation of Keynes, Leijonhufvud also laid stress on the idea that what Keynes was really talking about is his theory of "involuntary unemployment" was the problem of imperfect knowledge in a decentralized market. What are your thoughts on that interpretation?

HABERLER: There, I don't think they are right. This is the modern theory of the microfoundations of monetary and inflation theory. I am all for microfoundations, but that particular type I again think goes too far. Leijonhufvud and James Tobin propose, as an amendment to Keynes, that workers are not concerned with their absolute wage, but with their relative wage. If they see that somebody else gets more than they do, they ask for a higher wage, even if it means that they remain unemployed. That makes no sense to me. Workers do not always know what their fellows are getting. It certainly doesn't apply to the mass unemployment which existed in the 1930s. People had no jobs. This new interpretation of Keynes–that what is more relevant is whether someone in a similar position is better off–is, I think, quite unrealistic.

AEN: Do you think that a good part of the unemployment of the 1930s was due to wage rigidities?

HABERLER: Yes, of course. Pigou took the same position, but said it did not mean that he would recommend deflating the economy to increase the real money stock through flexible wages and prices. If you are in such a situation, then you have to manipulate demand, and in such an extreme depression you have to manipulate it, as I said before, by injecting money directly into the income stream, rather than by relying on the Pigou effect. What Hayek, Plant and Robbins in were really recommending in their London Times letter of 1932 (though they didn't put it in those words) was to rely on the Pigou effect to bring the economy back into balance, and I think that was very unrealistic.

AEN: What is the history behind your writing of Prosperity and Depression?

HABERLER: I was asked by the League of Nations to come to Geneva. They had a grant from the Rockefeller Foundation to start work on business cycles. They wanted a work reviewing business cycle theories to see which points various theories had in common, which theories were relevant, and whether a synthesis was possible. That's what I tried to do.

AEN: What are your views on the monetary approach to the balance of payments, which has recently come out of Chicago?

HABERLER: I don't know whether you saw it, but I wrote a review of a book by Harry Johnson on that topic was a little critical of it. I was sorry my good friend, Harry, was very unhappy with that review. My feeling was that it was half-baked; they were very unjust toward what they called the elasticity approach and the absorption approach, and that they all can be put together in one baggage. The elasticity approach is not without its merits. But I said all I have to say in that review in the Journal of Economic Literature, vol. XIV, no. 4 (December 1976), pp. 1324-1328).

AEN: Do you see the monetary approach as basically the classical approach to the balance of payments?

HABERLER: That's what they said, that it all started with David Hume. Jacob Frenkel from Chicago wrote a book on the history of the monetary approach to the balance of payments in which he mentions almost every economist who wrote on that subject between Hume and Harry Johnson as having contributed to the monetary approach. I think that shows that it isn't so novel.

And it is also probably my Austrian background and the inflationary experience we all went through in the 1920s. That made us a little more sensitive to inflation and the distinction between the real and money rate of interest, and the role of inflation in influencing the exchange rate, and the foreign exchange market. The American and British economists who had not had this experience with high inflation were, perhaps, a little handicapped, a little slower in catching on to the inflation problem.

AEN: How would you assess our most recent experience with freely floating exchange rates?

HABERLER: Floating exchange rates came about because fixed exchange rates cannot work in a milieu of high inflation. The basic fact is that if you have high inflation of the major countries, those countries cannot agree on a common rate of inflation of, say, ten percent. There are those countries which simply don't go along, and you get the inflation differential between Germany, Switzerland and Japan, on the one hand, and the United States on the other. That accounts for the decline of the dollar and for the fact that Bretton Woods has been replaced by floating rates. Of course, there are about forty countries that still peg their currencies to the dollar, and there are a few currencies which are pegged to the Mark. But the major currencies all float because of the large inflation differential.

AEN: Do you think floating exchange rates have prevented the spread of the inflation virus from on part of the world economy to another?

HABERLER: Yes, I think so. Otherwise German, Swiss and Japanese inflation rates could not have gone down, for example the Swiss to zero, the German to two percent, and the Japanese to three and a half percent. With fixed rates they would have had to follow the dollar, so in that sense it has prevented the spread of inflation to a few countries–only a few, unfortunately–who have managed to bring their inflation rate down.

AEN: What do you recommend as a long run solution to our international monetary problems?

HABERLER: The most important thing is for the United States to bring its inflation rate down. After all the United States looms very large in the world economy and the dollar is still the foremost international reserve and transactions currency. Therefore, we should bring our inflation rate down at least to the German level; if we could do that, then the remaining imbalances or reemerging imbalances could be handled by minor fluctuations in the exchange rate.

AEN: But you would not be for going back to fixed exchange rates?

HABERLER: This is simply impossible, because, not everybody is ready for it. If the major countries come down to a lower inflation rate, then the exchange rates will stabilize all by themselves. But it puts the cart before the horse to say first: "Let's go back to fixed exchange rates," and assume that everybody will behave.

After all, we tried that; we had the Bretton Woods system and it broke down because not everybody behaved. That situation has not changed. For that same reason, I am rather skeptical about the new European monetary system. The Germans are now down to a two percent inflation rate; the Italians are over ten percent. I simply cannot understand how can you stabilize their currencies with these inflation rates.

The Italians are supposed to get the margin of six percent, but if they have ten percent inflation, six is not enough. That can work only if the Germans underwrite the inflation of France, Italy, Denmark and Ireland. And perhaps the British will also come in if the Germans are willing to underwrite them.

AEN: How relevant is the purchasing power parity theory in explaining the current decline in the dollar or the foreign exchange market?

HABERLER: There is certainly a connection with the purchasing power theory. The price levels between different countries cannot diverge indefinitely. It's not a very precise instrument, but roughly speaking the movements in the exchange rates do reflect their respective inflation rates. Sometimes it's magnified, and especially today with the large dollar balances. The diversification of these balances when the dollar shows signs of going down all the time, may push the dollar temporarily below the equilibrium rate, but basically I think the exchange rates are determined by inflation rates.

But there are different indices, you know; you can take the GNP deflator, the CPI, or the index of manufactured goods and this gives you different results. It's not a very precise instrument. But as the purchasing power parity theory demonstrates there are connections between the price levels of different countries and their exchange rates. There is no doubt that the purchasing power parity theory is useful.

AEN: Do you see any difference between the standard version which comes from the Swedish economist, Gustav Cassel, and the version of the purchasing power parity theory developed by Mises which does not focus on price indices?

HABERLER: Mises didn't like terms "price level" and so on, and as a result I thought he got into difficulties. Yes, as you say, he basically had the same theory as Cassell, but then he said that it was not possible to speak of "price levels" or use to index numbers, and I saw a contradiction in this. You can put it in terms of the methodology of subjectivism, and go down to small aggregates, or ideally to individuals, and reject the aggregative approach, but that I think is practically impossible. You can't handle such complicated problems by going down really to the last individual unit. The economy is too complicated for that; you have to use aggregates.

AEN: What do you see as the main causes and consequences of the current worldwide stagflation?

HABERLER: The main cause is that we have gotten too far from a system of competitive capitalism. In a really competitive economy, one that would be much more competitive than ours as far as prices and wages are concerned, there would be no stagflation. Stagflation, i.e., ?the combination of high unemployment and rising prices, is possible only if you have rigid wages and, therefore, also rigid prices. So stagflation is not due to a basic defect of the capitalist free enterprise economy, but, on the contrary, to the fact that we have gotten too far away from the ideal of the competitive economy.

AEN: You have criticized the ideal of the notion of perfect competition as the main criterion in formulation anti-monopoly policy. What are the conditions of a workable competition? How much control of monopoly should there be?

HABERLER: Well, this is a big question. I have not done much work on that. In my mind the basic problem is in the labor field. Money wages have become completely rigid downward in practically all countries. Further, real wages have become completely rigid downward through indexation and so on. Apart from the labor field, the situation is not too bad.

The growth of international trade is the postwar period has introduced much more flexibility. If we just think of the United States, we have three or four automobile firms. That would be an ideal case of oligopoly, but with all the competition that comes from Europe and Japan, and now even from less developed countries, the economy has really become more competitive.

So to my mind it is mostly the labor field, and then also, of course, from government policies. Governments, one the one hand, make wages rigid by helping the unions in various ways, minimum wages and so on, for example; also among the main culprits are government regulation and protectionism.

AEN: What policies would you recommend to cure the current stagflation?

HABERLER: To curb the power of unions and reduce government regulation. The best anti-monopoly policy is free trade. We are very far away from that and are getting even farther away from it.

AEN: What are the reasons behind the repeated calls for wage and price controls? We've had bad experiences with them, and yet people still call for them.

HABERLER: They have never worked, and yet, despite that, they have been tried again and again. Nobody wants to go back to a more flexible, competitive system. So people think they can do it artificially by working on the symptoms, rather than on the causes. Democracy has its drawbacks, but many of the dictatorships are not doing much better.

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