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DOUGLASS C. NORTH, STRUCTURE AND CHANGE IN ECONOMIC HISTORY (1982)
DEFINTION OF STATE: State is an organization with a comparative advantage over violence, extending over a geographic area whose boundaries are determined its power to tax constituents. ARGUMENT PRESENTED: North presents a model of the state as both a contract and an exploitative regime. The contract: the state provides goods (security and justice) in exchange for taxes. To promote growth (and thus taxation), the state provides public goods (to lower transaction costs; e.g. creates standardized weights and measures). This theory may explain why the state potentially can provide a framework for economizing on the use of resources and therefore can promote wealth. The exploit: The state, in its fuction, to exctract income from the rest of the constituents in the interest of that group or class. To maximize tax receipts, the regime alters property rights to extract the highest rents possible. The predatory theory ignores the initial gains of contracting and focuses on the extraction of rents from constituents by those who gain control of the state. Role of the state is to maximise wealth for society and to function as the third-party to enforce contracts which can be done by written or unwritten constitution.
TWO ASPECTS FUNDAMENTAL TO ECONOMIC HISTORY: 1. The widespread tendency of states to produce inefficient property rights and hence fail to achieve sustained growth. Inherent instability of all states which leads to economic change and ultimately to economic decline.
THREE ESSSENTIAL CHARACTERISTICS OF A STATE WITH WEALTH- OR UTILITY-MAXIMIZING TENDENCIES 1. State trades services (protection & justice) for revenue Total income in the society is higher as a result of an organization specializing in these services that it would be if each individual in society protected his own property. State acts like a discriminate monopolist The state separates each group of constituents, further, devising property rights to maximize revenue State is constrained by opportunity cost of its constituents since there always exist rivals to service provision
Douglas North. STRUCTURE AND CHANGE IN ECONOMIC HISTORY | 1
to reduce transaction costs in order to foster maximum output of the society and. whether evolving as a body of unwritten customs or as a written constitution.STATE OBJECTIVES: The basic services that the state provides are the underlying rules of the game. The second objective will result in the provision of a set of public (or semi-public) goods and services designed to lower the cost of specifying. 5. Within the framework of the first objective. increas tax revenues accruing to the state. 3. and enforcing contracts which underlie economic exchange. number of neighbours. IMPLICATIONS FOR STATE OBJECTIVES: 1. however. Inconsistency between objectives: cannot maximize both societal and ruler output. they have two objectives: 1. To specify the fundamental rules of competition and cooperation which will provide a structure of property rights for maximizing the rents accruing to the ruler. 4. The creation of an infrastructure designed to specify and enforce a body of property rights entails the delegation of power to agents of the ruler. 2. The ruler’s efforts to gain or keep constituents will be determined by the supply curve of protection and the marginal benefits to be derived from the additional constituents. The ruler may have competition for other regimes. 2. Have to delegate power to agents of ruler. negotiating. the effect of such diffusion of the powers of ruler will also be a reduction in the monopoly rents of the ruler. supply curve of protection) The closer the substitutes. Douglas North. STRUCTURE AND CHANGE IN ECONOMIC HISTORY | 2 . Services provided by rulers have supply curves that may be costly to the ruler depending on the technology and need for protection The cost curve of protection would be relative of the military technology and would specify the size of the political-economic unit as “efficient”when the marginal cost of protection was equal to the incremental tax revenue. the fewer degrees of freedom the ruler possesses. This depends on the structure of competitive political units (geographic proximity. therefore. The services provided by the ruler have differently shaped supply curves. the two are not completely consistent. Put together. Property rights will never be fully efficient because the ruler will agree to favourable property rights from some groups regardless of its effect on efficiency. and the greater the percentage of incremental income that will be retained by the constituents.
no matter how oppressive. or alternatively. The free rider problem has implications for the state: 1. 6. Changes at the margin lead to instantaneous adjustment. In Early modern Europe. Technological change. Where the ruler is from a particular class. Theories originating in social science & Marxist thoughts do not provide convincing theoretical understanding for how to overcome the free-rider problem. Institutional innovation will come from above of the hierarchy (because of free riding. the constituents can force the ruler to give up some of his rule-making powers. adjustments occur only as long as the private returns exceed private costs. the ruler would have to modify property rights and such in order to: (a) appease possible alternative rulers and (b) continue maximizing rents subject to the constraints of Problem of Free Ridership: States are more stable than predicted because of free-riders The costs to the individual of opposing the coercive forces of the state have traditionally resulted in apathy and acceptance of the state’s rules. Changes in information cost or technology can destabilise the state A change in relative prices that improves the bargaining power of a group of constituents can lead to alteration of the rules to give the group more income. The property rights and allocation implications of the rise of pluralism are explored everywhere. the growth of manufacturing and services. Revolutions will usually be executed at the top (e. Alterations in military technology led in some instances to the delegation of rule-making powers in return for the increased revenue needed for survival. With the second Economic Revolution. and in particular the growing importance of human capital have transformed the structure of production and created new interest groups.Efficient property rights may lead to higher income in the state but lower tax revenues for the ruler because of the transaction costs as compared to those of a more inefficient set of property rights. further. STRUCTURE AND CHANGE IN ECONOMIC HISTORY | 3 . the growing share of income going to labor. a coup) from ruler’s agents 3.g. Whenever the relative value of land/labour or anything else changes. the decline in the relative importance of land rent. and so forth would alter relative prices and the opportunity cost of constituents and would lead eventually to conflicts with the fundamental ownership structure of property rights. the spread of more efficient markets. citizens won’t come up with new institutions) 2. some rules for successions will be devised to minimize the opportunities for disruptive change or revolution upon the ruler’s death Douglas North. otherwise the free rider problem will prevent adjustment. they are the basis of the struggle to control the state that has been going on in the past century.