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Egypt- all economic impediments they face stem from the way political power in Egypt is exercised and monopolized by a narrow elite Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it (for ex. 70 billion dollar fortune accumulated by Mubarak). Countries such as Great Britain and US have become rich because citizens have overthrown elites who controlled power and created a society where political rights were much more broadly distributed, government was accountable and responsive to citizens, and where great mass of people can take advantage of economic opportunities. The Revolution expanded political rights for countries like Europe. It did not spread out for countries like Egypt. Although Egypt was under the English rule for several decades, imperialism did not teach Egypt of the ways of the Revolution but created another distinct hegemony that of the English being superior to their colony. The Beginning- Latin America Juan Diaz de Solis explores Rio de la Plata (River of Silver) in 1516, and Pedro de Mendoza found Buenos Aires in 1534 But Solis and Mendoza unable to enslave and put to work the hunter-gatherers Indians of the area, the Charruas and the Querandi. Starving Spaniards soon left the area. In 1537, Juan de Ayolas found the sedentary and more densely settled Guarani up the Parana river, in Paraguay. The Spaniards could not successfully take over the Guarani hierarchy, enslave them and put them to work to produce food for them. A very similar pattern of colonization of the Aztecs and the Incas The Beginning- US Colonization attempts of Virginia Company in Jamestown in early 17th century, attempting to create an authoritarian, extractive regime No man or woman shall run away from the colony to the Indians, upon pain of death Anyone who robs a garden, public or private, or a vineyard, or who steals ears of corn shall be punished with death. No member of the colony will sell or give any commodity of this country to a captain, mariner, master or sailor to transport out of the colony, for his own private uses, upon pain of death. [from the laws passed by Sir Thomas Gates and Sir Thomas Dale]. But the Company was unsuccessful it could not force the English

settlers into gang labor and low wages. Company switched to a headright system giving all the settlers 50 acres of land and then shortly thereafter also political rights, in the form of it General Assembly in 1969 Similar events unfolded in Pennsylvania, Carolina, and Maryland The chain of events ultimately leading to the declaration of Independence and the U.S. Constitution The differences in the ways Latin America and North America were organized historically explain the differences in the ways they are organized today and their different levels of prosperity

Making Sense of the Divergence While both culture (religion, attitudes and values) and geography (climate, topography, disease environments) are important for the ability of humans to form well-functioning societies, they are not the main source of this divergence o Much of Latin America likely richer than North America as late as mid-18th century o DIVERGENCE IS DUE TO THE INABILITY OF THE UNITED STATES, JUST LIKE BRITAIN, TO TAKE ADVANTAGE OF NEW ECONOMIC OPPORTUNITIES An ignorance hypothesis also unable to explain the logic of social arrangements leading to relative poverty Cortes, Pizarro, and Ayolas did not set up forced labor and repressive regimes because they were ignorant of the implications Instead, central role of institutions, broadly defined the rules that govern economic and political behavior Key questions: historical roots of institutional differences and the logic of institutions do not unleash growth Towards a Theory of Institutions EXTRACTIVE ECONOMIC INSTITUTIONS- Lack of law and order. Insecure property rights; entry barriers and regulations preventing functioning of markets and creating a nonlevel playing field EXTRACTIVE POLITICAL INSTITUTIONS: in the limit of absolutism: Political institutions concentrating power in the hands of few, without constraints, checks and balances or rule of law INCLUSIVE ECONOMIC INSTITUTIONS: Secure property rights, law and order, markets and state support (public services and regulation) for markets, open to relatively free entry of new businesses; uphold contracts; access to education and opportunity for the great majority of citizens INCLUSIVE POLITICAL INSTITUTIONS: Political institutions allowing broad participationpluralism- and placing constraints and checks on politicians; rule of law (closely related to pluralism) But also some degree of political centralization for the states to be able to effectively enforce law and order Growth Under Inclusive Institutions Inclusive economic and political institutions (OR INCLUSIVE INSTITUTIONS FOR SHORT), create powerful forces toward economic growth by: o Encouraging investment (because of well-enforced property rights)

Harnessing the power of markets (better allocation of resources, entry of more efficient firms, ability to finance for starting businesses etc.) o Generating broad-based participation (education, gain free entry, and broad-based property rights) Key aspect of growth under inclusive institutions: investment in new technology and creative destruction Central question: Why are extractive institutions so prevalent throughout history and even today? The Logic of Extractive Institutions Main thesis is that growth is much more likely under inclusive institutions than extractive institutions Growth, and inclusive institutions that will support it, will create both winners and losers. Thus there is a logic supporting extractive institutions and their stagnation: o Economic losers: those who will lose their incomes, for example their monopolies, because of changes in institutions or introduction of new technologies o Political losers: those who will lose their unconstrained monopoly of power, because of growth and its supporting institutions- fear of creative destruction o Both are important in practice but particularly political losers are a major barrier against the emergence of inclusive institutions and economic growth. Growth Under Extractive Political Institutions Though growth is much more likely under inclusive institutions, it is still possible under extractive institutions Why?Generate output and resources to extract Two types of growth under extractive political institutions: o Extractive economic institutions allocating resources to high productivity activities controlled by the elites (e.g. Barbados, Soviet Union) o When relatively secure in their position, the elites may wish to allow the emergence of relatively inclusive economic institutions under their control (e.g. South Korea under General Park, China today) o But big difference from growth of inclusive institutions: no creative destruction and dynamics very different. Consequently, even though growth is possible under extractive institutions, this will not be sustained growth Towards a Theory of Institutional Change As a consequence of the distributional consequences of institutions conflict pervasive in society In the context of differential institutional driftsmall but notable differences in institutions across nations Small differences that matter when critical junctures arise- confluence of actors which can determine status quo Institutions- drift-institutionst+1 critical juncture institutional divergence But outcomes not historically determined, partly contigent The changes that happen as a result of this interaction then become the background institutional differences upon which new critical junctures act

Transition to Inclusive Institutions Extractive institutions have been the norm in world history. Where do inclusive institutions come from? o Earlier moves towards inclusive institutions resulting from conflict and institutional driftRoman Republic, Venice but ultimately reversed Crucial turning point can be found in the Glorious Revolution in England in 1688 o The Glorious Revolution brought much more inclusive, pluralistic political institutions which then led to a transition towards much more inclusive institutions This created the conditions which led to the Industrial Revolution Growth in the 19th century and dissemination of industry were conditioned by interactions between initial institutional differences and the critical junctures created by political events and the Industrial Revolution itself. Institutional Divergence at Critical Junctures: Black Death and Feudalism The divergence of Western and Eastern Europe after the Black Death- in the West the power of landlords declines and feudalism withers away, in the East, the power of landlords intensifies leading to the Second Serfdom in the 16th century The institutional divergence driven by a large demographic shock interacting with initial institutional differences (organization of peasant communities, distribution of land holdings) Key mechanism: increases in wages following population decline (e.g. Phelps, Brown and Hopkins, 1956) Why do nations fail? -Because they have extractive political and economic institutions -These are difficult to change though they can be successfully challenged and altered during critical junctures -The roots of modern world inequality lie in the emergence of inclusive institutions in Britain and the fruits of this- the industrial revolution spread to those parts of the world that had similar institutions (settler colonies) or quickly developed them (Western Europe) -Other parts of the world languished with extractive institutions which have persisted over time and thus remain poor today

THE ORIGINS OF THE RULE OF LAW Law vs. legislation Law- abstract body of rules of justice that bind a community together -fixed by an authority higher than any human legislator, either by a divine authority Legislation- positive law, function of political power, that is, the ability of a king, baron, president, legislature, or warlord to MAKE and enforce new rules based ultimately on some combination of power and authority State building and the rule of law therefore coexist in a certain tension

Rulers can enhance their authority by acting within and on behalf of the law vs. the law can prevent them from doing things they would like to do, not just for their private interest but for the interest of the community as a whole CONTEMPORARY CONFUSIONS CONCERNING THE RULE OF LAW Contemporary developing countries -one of the greatest POLITICAL deficits lies in the relative weakness of the RULE OF LAW EFFECTIVE LEGAL INSTITUTIONS ARE PERHAPS THE MOST DIFFICULT TO CONSTRUCT -legal institutions, on the other hand, must be spread throughout the entire country and maintained on an ongoing basis -legal institutions require physical facilities as well as huge investments in the training of lawyers, judges, and other officers of the court; including police who will ultimately enforce the law ESTABLISHMENT OF THE RULE OF LAW= ECONOMIC DEVELOPMENT -absence of strong rule of law is indeed one of the reasons why poor countries cant achieve higher rates of growth Modern Property Rights -those held by individuals who are free to buy and sell their property w/o restrictions imposed by kin groups, religious authorities and the State [property rights and contract are related to economic growth] Obviously, if a government does not feel bound by a preexisting rule of law, but considers itself fully sovereign in all aspects, nothing will prevent it from taking the property of its citizens, or of foreigners who happen to be doing business with it It is perfectly possible however, to have good enough property rights and contract enforcement that permit economic development w/o existence of a true rule of law Ex. Peoples Republic of China There is no true rule of law in China today, the Chinese Communist Party does not accept the authority of any other institution in China as superior to it or able to overturn its decisions When the party disbanded collective forms in 1978 under the Household Responsibility law, it did not restore to Chinese peasants full modern property rights but it gave them usufructuary (one having the use or enjoyment of something) rights to their land These rights were good enough to lead to a doubling of agricultural output just four years after change of property rules The economists emphasis on modern property rights and contract enforcement under a rule of law may be misplaced in two aspects In the contemporary world, where continuous technological innovation is possible, good enough property rights w/ no sovereign rule of law are at times sufficient to produce high rates of economic growth In a Malthusian world, such rates of growth are not achievable even presuming the existence of modern property rights and a rule of law because the binding constraints on growth lies elsewhere

Another definition of RoL that likely had as great impact on economic life in premodern, as in contemporary times. Is the security of persons, the ability to exit from the violent state of nature and go about ones daily business w/o fear of being killed or robbed Tend to appreciate it when it is absent rather than present Finally, it is not possible to talk about the RoL without specifying to whom should it apply = the circle of people who are considered legal persons protected by the law Societies seek to enforce basic social rules universally, but a rule of law that protects citizens against arbitrary actions of the state itself is often initially applied only to a minority of privileged subjects THE LAW PROTECTS THE INTERESTS OF ELITES WHO ARE CLOSE TO THE STATE OR WHO CONTROL THE STATE Ex. Mme. de Sevigne of Francesalon patron of 17th century France In a letter to her daughter describes how soldiers in Brittany were enforcing a new tax, turning old man and children out of their houses in search of assets to seize 60 townspeople were to be hanged the following day for nonpayment French State would not enforce such drastic penalties on Mme de Sevigne and her circle Imposed onerous taxes on commoners precisely because it was too respectful of the property rights and personal security of the aristocracy So.IT IS THEREFORE NOT TRUE THAT THERE WAS NO RULE OF LAW IN 17TH CENTURY FRANCE, BUT THE LAW DID NOT REGARD COMMONERS AS LEGAL PERSONS ENTITLED TO THE SAME RIGHTS AS THE ARISTOCRACY People lucky enough to live in countries w/a strong rule of law usually dont understand how it arose in the first place (thus failure of programs to improve rule of law in poor countries designed by rich) They mistake outward forms of the rule of law for its substances Ex. Checks and balances taken to be a hallmark of a strong rule of law in society (branches of government check one another) BUT!!!! The mere existence of a formal check is not equal to strong democratic governance Courts can be used to protect interest of elites Ex. 1905 Supreme Court case of Lochner vs. New York; protected business interests against a legislative effort to limit working hours Where did law itself- that is, a common set of rules of justice- originate? How did specific rules regarding property rights, contract enforcement and commercial law develop? And how did the highest political authorities come to accept the sovereignty of law?

HAYEKS THEORY THAT LAW IS PRIOR TO LEGISLATION Friedrich A. Hayek godfather of contemporary libertarianism, but libertarians are not opposed to rules as such: only the existence of common rules make the peaceful existence of individuals in society possible

HAYEK -constructivism is a conceit of the last 300 years and particularly of a series of French thinkers including Descartes and Voltaire who thought that the human mind was sufficient enough to understand the workings of human society -TOP-DOWN APPROACH WONT WORK political power, for ex. Soviet Union

RATIONALIST/ CONSTRUCTIVIST -that it proceeded from the will of a legislator who rationally studied the problems of society and devised a law to establish what he thought was a better social order

HAYEK SAYS THAT THE RATIONALIST THEORY IS WRONG 1) No single planner could ever have enough knowledge about the actual workings of a society to rationally re-order it -the bulk of knowledge in a society was local in character and dispersed throughout the whole society; no individual could master enough information to anticipate the effects of a planned change in the laws or rules 2) SOCIAL ORDER IS NOT TOP-DOWN but occurs spontaneously through the interactions of hundreds or thousands of dispersed individuals who experimented with rules, kept the ones that worked and rejected those that didnt 3) Law itself a spontaneous order and there can be no doubt that existed for ages before it occurred to man that he could make or alter it individuals had learned to observe and enforce rules of conduct long before such rules could be expressed in words LEGISLATION came relatively late in the history of mankind all law is, can be, and ought to be, the product of the free invention of a legislatoris actually false and an erroneous product of CONSTRUCTIVIST RATIONALISM EX. ENGLISH COMMON LAW -cumulative decisions of countless judges -more adaptive and market-friendly than the continental tradition of civil law Sir Edward Coke -common law dated from time immemorial Legal centralists -formal legislated laws create and shape moral values FROM CUSTOMARY TO COMMON LAW HAYEKS INSIGHT -based on the decentralized evolution of social rules Legal periphalist -simply codify existing norms

-but there have been major discontinuities in the development of law that can only be explained by intervention of political authority and not spontaneous order TRIBALSTATE-LEVEL FORMS OF ORGANIZATION Tribal justice between individuals is a bit like contemporary international relationsbased on self-help of rival groups in a world where there is not 3rd party enforcer of rules AS COMPARED TO OR DEVELOPED INTO State-level societies- different precisely because such an enforcer exists, which is the STATE itself The first known compilation of Anglo- Saxon tribal



Property- guards troubled boundary between individual man and state -many other institutions guard as well, like legislative institutions -BUT our society chiefly values material well-being and power to control particular portion of well-being is the foundation of individuality -During the past decade, important devt in US has been that the government is a major source of wealth GOVERNMENT AS A GIGANTIC SYPHON Why? 1) Draws in revenue and power 2) Pours forth wealth: money, benefits, services, contracts, franchises and licenses FUNCTION TIME IMMEMORIAL; EARLY TIMES MINORtodays distribution of largess is on a vast imperial, scale. -valuables dispensed by the government are steadily taking over, taking the place of traditional forms of wealth- forms which are held as private property. Ex. 1) social insurance substitutes savings 2) Government contract = businessmans customers and goodwill 3) wealth of more Americans depends upon a relationship to the government 4) Americans live on government largess- allocated by government in its own terms and held by recipients subject to conditions which express public interest Growth of government largess affects underpinnings of individualism and independence Influences Bill of Rights Impact on the power of private interests in their relation to each other and to government WHOLE ARTICLE DISCUSSES 1) EXAMINATION AND NATURE OF GOVERNMENT LARGESS 2) REVIEWS THE SYSTEM OF LAW (IN RELATION TO GOVERNMENT LARGESSSUBSTANTIVE AND PROCEDURAL 3) EXAMINES SOME OF THE CONSEQUENCES, TO THE INDIVIDUAL TO THE PRIVATE INTERESTS AND TO SOCIETY 4) CONSIDERS FUNCTIONS OF PROPERTY AND RELATIONSHIP TO THE PUBLIC INTEREST I. LARGESS OF THE GOVERNMENT a. Forms of Government Created Wealth 1) Income and Benefits -government is a source of income for people even thought they dont have jobs Ex. Eligibility arises from legal status; SS benefits Unemployment compensation Aid to dependent children Veteran benefits 2) Jobs -more than 9 million people receive income from public funds directly employed by federal state or local government -size of publicly employed working force increased rapidly since founding of the US and likely to increase

3) Occupational Licenses -licenses required before anyone may engage in many kinds of work Ex. Practicing medicine Guiding hunters through woods licenses which are dispensed of by the government make it possible for holders to receive what is ordinarily their chief source of income 4) Franchises -partial monopoly-created and handed out by government -value depends largely upon governmental power. HOW? by limiting number of franchises, government can make them extremely renumerative Ex. NY taxi medallion -costs very little when originally obtained from the city sold for 20,000 dollars WHY? -city has not issued new transferable medallions despite rise in population and traffic TV channel- handed out for free; but instead sold for many millions * Government distributes wealth when it dispenses route permits to truckers, charters to bus lines, routes to air carriers, certificates to oil and gas pipelines, licenses to liquor stores, allotments to growers of cotton and wheat, concessions in national parks 5) Contracts -individuals and business enjoy public generosity in the form of contracts -50 billion dollars annually flows from govt in the form of defense spending -often resemble subsidies; virtually impossible to lose money on them -businesses sometimes make the government their principal source of income and many free enterprises are set up primarily to do business with the govt 6) Subsidies welfare payments for individuals who cannot manage independently in the economysubsidies = business Ex. A. agriculture subsidized to help it survive against better organized (and less competitive) sectors of economy B. Shipping industry given a dole because of its inability to compete with foreign lines C. Local airlines D. non-business activities like scientific research, health and education 7) Use of public resources -large part of American economy is publicly owned -govt owns or controls hundreds of millions of acres of public lands, public lands which are valuable for mining, grazing, lumbering and recreation; sources of energy; tideland reservoirs of oil; nuclear power; routes of travel and commerceairways; radio-TV spectrum avenue for all broadcasting; hordes of surplus crops and

materials; public buildings and facilitiesresources available for utilization by private individualssuch use is often equivalent to a subsidy RADIO-TV use scarce channels of air for free ELECTRIC companiesuse publicly-owned water power STOCKMEN graze sheep and cattle on public lands at nominal cost SHIPS AND AIRPLANESarrive and depart from publicly-owned docks and airports ATOMIC-ENERGY INDUSTRY uses govt materials, facilities and know-how 8) Services govt services source of wealth some are plainly of commercial value; postal service for periodicals, newspapers, advertisers, mail-order houses; insurance for home-builders and saving banks; technical info agriculture sewage, sanitation, police and fire protection, public transportation Communications satellite unusual type of subsidy through service: turning over of government research and know-how to quasi- private organization EDUCATION, GREATEST SOURCE OF VALUE! b. Importance of Government Largess 1961 when personal income totaled $416, 432, 000, governmental expenditures on all levels amounted to $164, 875, 000, 000 Government payroll reached 45 billion dollars Do not take into account vast intangible wealth represented by licenses, franchises, services and resources PROPORTION of govt wealth increasing dependence but NOT VOLUNTARY Valuables that flow from govtsubstitutes rather than supplements, other forms of wealth SS and other forms of public insurancesupported by taxes Tax money no longer available for individual savings or insurance Taxpayer now a participant in public insurance by compulsion and his ability to care for his own needs independently is reduced NO CHOICE ABOUT USING PUBLIC SERVICES CREATING A DEPENDENCE ON THE GOVT

Dependence creates a vicious cycle of dependence -it is hard for a business to give up government help as it is for an individual to live on a reduced income -when one sector of the economy is subsidized, others are forced to seek comparable participation -GEOGRAPHIC government contracts can fundamentally influence economy of a region -ex. If one form of transportation is subsidized, other types of transpo may be compelled to seek subsidies -when some occupations subsidized, other which help to pay bill, find themselves disadvantaged as a class -ex. 1) musiciansseeking subsidy to pay for food bills made artificially high because of another subsidy

2) unemployed worker replaced by a machine seeks government funds to retainwhen machine was created through government subsidized research and development GOVERNMENT LARGESS -necessarily assume greater importance as we move closer to the welfare state; the welfare state undertakes responsibility for well-being of citizens who cant provide basic services for themselves Responsibility can only be carred out by what was defined as government largess! C. Largess and the Changing Forms of Wealth More and more wealth takes the form of right and status RATHER THAN TANGIBLE GOODS Ex. Individuals profession Large manufacturer physical assets not important but contracts, business arrangements and organization -steel companys relationships with cool and iron producers more valuable than plant and equipment *To the individual, these new forms, such as profession, job, or right to receive income are basis of his various statuses in society most meaningful and distinctive wealth he possesses II. EMERGING SYSTEM OF LAW

WEALTH or VALUE created by culture or society vs. PROPERTY LEADS TO CREATION OF LAW Property represents relationship between wealth and its owner Government Largess is then wealth, not property And has given rise to a distinctive system of law SYSTEM VIEWED IN 3 PERSPECTIVES 1) Rights of Holders of Government Largess 2) Powers of the Government over Largess 3) Procedure by which holders rights and governmental power are adjusted A. Individual Rights in Largess PRESSURE FOR PROTECTION OF INDIVIDUAL INTERESTS Ex. Holder of a broadcast license or motor carrier permit or a grazing permit, tends to consider his land his own and to seek legal interference w/ his enjoyment Right vs. privilege Legal protection of right by far greater importance Ex. Holder of a license had a right may be entitled to a hearing before license could be revoked mere privilege might be revoked w/o notice or hearing Gratuity principle -often considered as gratuity furnished by state state can withhold grant or revoke largess at its pleasure -government considered to be in somewhat same position as the private giver

Whole and the parts -since government may completely withhold a benefit it may grant it subject to any terms or conditions whatsoever -WHOLE POWER MUST INCLUDE ALL OF ITS PARTS Internal management -government should have control over its own housekeeping or internal management functions -government treated like private business 4 theories blurred in a single statement of judicial attitude in accepting charity, the appellant has consented to the provisions of the law under which charity is bestowed -These sentiments are often voiced in the law of government largess but individual interests have also grown up. - the most common forms of protection are procedural, coupled w/ an insistence that government action be based on standards that are not arbitrary or unauthorized Courts have most readily granted protection to those types which are intimately bound up w/ individuals freedom to earn a living Occupational licenses -courts said that occupational or professional license may not be denied or revoked w/o affording the applicant notice and a hearing PROCEDURE! With regard to licenses not tied to occupation, drivers license not an economic right but aspect of personal liberty Franchises -less of a natural right than an occupational license -confers an exclusive or monopoly position established by government -but the courts took the position that certain types of franchises were property protected by the Constitution Ex. Air-route certificates Benefits -courts have moved toward a measure of legal protection for benefits Ex. District of Columbia CA rejected argument that a VA decision is not reviewable by courts Subsidies -a subsidy to a business