Big lessons from History seen by economists: “Wanna be both prosperous and free? Compete!”

May 24, 2007

I just read a paper that made me want to shut down this blog, to change career, and, of course, to start another blog entitled Local conditions. Discreetly, last December three Economics giants, Douglass North, John Joseph Wallis, and Barry Weingast, published a very dry NBER paper entitled:

“A Conceptual Framework for Interpreting Recorded Human History”

(this is a link to a free pdf version of it)

Well, that’s exactly what all social scientists are looking for! A broad concept that “explains it all”. I am glad they didn’t entitle it “The Conceptual Framework”, since it would have forced Academia to seek a new purpose. Unfortunately for the paper, but fortunately for the academic business, this paper is likely just to be an extra line on student’s reading lists starting in the academic year 2007, and life to go on as usual.

Yet the paper does deserve a great deal of publicity. A boost was given to it already by Martin Wolf in a column on Russia that dates back to last February. I am currently on a big research project on Russia, and given current political circumstances in Russia I feel intellectually challenged (in order not to say: lost). I can’t decide whether Russia is, despite the current political turbulences, broadly on the right track, or if the recent boom Russia witnessed simply provided the means for a corrupt and paranoid petro-elite to strengthen its power and run the country to shambles, thereby endangering its neighbours. In my dismay I returned to Martin Wolf’s column that I hadn’t considered too helpful for my particular purposes initially (and still don’t). This time, however, I actually took the time to read 80 pages of that nerdy NBER paper. And discovered that even if it doesn’t help me much for my Russian project – too general, it does contribute do the overall reflection on why some are rich and free and most are poor and unfree on this small planet Earth of ours.

Now, to the substance:

North, Wallis and Weingast developed a powerful framework of analysis to understand the process of development. Be prepared, it is a world such as imagined by Hobbes, but turned on its head, as the final outcome is not a cruel Leviathan state, but the archetype of the liberal democracy.

So, humanity’s history is divided into three phases. 1) The primitive social order 2) the limited access order and 3) the open access order. The authors make clear that there is no teleology, no value judgement, nor any historical linearity in their assumptions. They simply propose a model that uses the tools of the economics discipline (competition, rents, rational behaviour, theory of the firm, etc.) to contribute to the understanding of human economic and social development.

The first, initial, stage is the primitive social order, the society of hunters and gatherers that dominated in pre-recorded human history, i.e., before humans settled down as agriculturalists in the Neolithic era around 10.000 BC.

It resembles a hobbesian world in which violence prevails. “The anthropological literature on primitive societies suggest that most primitive societies were extremely violent.”

“Specialists in violence” have the overhand and protect their clients. To achieve basic social order, individuals at war with each other agree to recognize each other’s rights to land, labour, and resources. This means: they accord each other the right to extract rents. The ensuing peace, by the simple fact of bringing back order, benefits not only the warrior and his clientele, but society as a whole.

These are the fundamental conditions for the emergence of the second order the authors call the limited access order.

Indeed, these violence specialists, by recognising the benefits of the rents they benefit from by agreeing not to fight,

“create a set of incentive-compatible institutional arrangements that provide for a nascent state, for property rights, for economic growth, and for the provision of some social order”

“the formation of the state provides a first order solution to the problem of limiting violence by inducing the most powerful members of society to create arrangements that reduce their potential gains from using violence. This form of state does not induce the powerful to disarm or refrain from threatening violence, nor does it eliminate violence”

Hence,

“a modicum of peace arises, despite the fact that the threat of violence continues to play a central and positive role in maintaining social order. The balance that enables social order to emerge is a balance that combines political, economic, and military interests.”

In such an environment, different historical developments have enabled the flourishing of very sophisticated civilisations, based on a state supported by elites who learned the benefits of increasing general wealth (China, Ottoman Empire, Roman Empire, etc.):

“it is (…) in the interests of the specialist/leaders to increase the productivity of the assets and people they control by encouraging trade, specialization, and the division of labor. (…) The relationship is repeated, by extension, to the formation of a set of elites who control all valuable economic, political, religious, educational, and military functions within society.”

Therefore the equilibrium that ensues in the limited access order is the based on the following fundamentals:

1) Control of violence through elite privileges
2) Limits on access to trade
3) Relatively strong property right protection for elites and relatively weak property right protection for non-elites. To the extent a natural state is characterized by the rule of law, it is for elites.
4) Restrictions on entry into and exit from economic, political, religious, educational, and military organizations.

Now, to the third stage, the open access order. It appeared in Western Europe about 300 years ago, spread into Asia in the 20th Century and still only affects a minority of human beings.

Fundamentally, open access orders combine the highest levels of income per person and the highest degree of political freedom.

The key to understanding open access orders is that they use competition as foundation of social order:

“Where limited access orders use rent-creation to provide social order, open access orders use competition”.

Useful reminder by the authors:

“When we say that the natural state provides social order by limiting entry, we do not mean to imply in any way that the natural state is not competitive! Indeed, it is the incredible dangerous reality of political competition through military means that makes the limitation of economic competition viable.”

also:

“open economic access assumed by neo-classical economic theory cannot be sustained without a corresponding open access on the political side that supports a stable system of private property rights and the rule of law”.

 

Back to the open access order. Its main characteristics are the following:

  • extension of property rights to the entire population, and extension of access to organizations (such as the state) and contractual relations and organizations (e.g. firms) to the entire population
  • violence in the sole hands of the state, which, like Max Weber put it “has the monopoly over legitimate violence”
  • the use of violence by the state is politically and institutionally constrained (i.e. the checks and balances introduced by democracies based on the rule of law and a constitutional order)
  • the presence of a multiplicity of organizations that can represent the interests of the various social groups and through non-violent means precisely constrain violence of the state, as well as the rent-seeking of economic interests

Question 1: How do you manage the transition from a limited access order to an open access order?

The authors underline the fact that it is difficult to predict how exactly this transition occurs (I was sooo disappointed when I read this!) – although they state that such a transition happens in a timeframe of approximately 50 years. They write, though, that transition generally happens in a “conservative” manner, within the framework of existing institutions and rules of behaviour, where the extension of access rights seems an automatic and natural things to do (forget Che Guevara). There are three conditions though that must be fulfilled to allow such a transition to occur in the first place:

a) Rule of law for elites

b) Perpetual forms of organizations for elites (including the state itself)

c) Political control of the military

At this stage indeed one realizes that only very few countries in the world actually fulfil these conditions. Let’s look at some cases of countries have considerably developed in recent years but still have many challenges to overcome:

  • Russia: rule of law non-existent, very embryonic for elites in financial services, no perpetual forms of organizations (a state that becomes more authoritarian, no functioning civil society), military under control, but the secret services not so much
  • Turkey: political control of the military is exactly what is currently at stake in the country’s political crisis
  • China: the Communist Party and the state (both one and the same) are the only perpetual form of organization for the elites; political control of the military is all right; the rule is not of the law, only of the Party
  • India: fulfils all the conditions, but has a social structure (caste system, religious divisions etc) that impede the healthy spread of competition throughout the entire social body
  • Latin America: considerable progress on all three fronts overall in the last two decades. Chavez’ Venezuela: none of those conditions fulfilled, really. A military man controls the elites. My native Honduras: even less.
  • Sub-Saharan Africa: South Africa fulfils these conditions, but not the rest of the continent, really.

Question 2: If you value and prosperity and freedom, how to contribute to others achieving it?

The authors are sceptical about any development aid being effective in societies with limited access order (this aids the President’s and his family’s Swiss bank account above all).

If one follows the logic of this paper, the answer is: more competition between countries. The authors refer to the literature on “Why Europe?” around the first take-off in history. The likes of David Landes and Deepak Lal state that competition between European states was one of the take-off’s main drivers (iconoclastic scientists or enterprising minorities fleeing a repressive country and settling in the neighbouring territory under its sovereign’s protection, governments disliking their neighbour becoming rich and doing something about it at home themselves, etc.). But: how does one apply this globally? And can we afford all this to take as long as Europe’s initial rise? Well, then: let’s compete on fruitful new ideas!

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