the current policy equilibrium. Although many policies create rents, most markets in open access orders are not cartelized or subject to high levels of tariff protection. The two social orders differ significantly on this dimension.

Fiscal incentives represent another set of incentives against rent-creation in open access orders that complement political competition.12 No matter what their goals, political officials in all governments need revenue to pursue them. This fiscal effect biases officials in favor of policies that enhance their revenue. Open access orders tend to raise revenue on broad taxes on economic activity, such as value-added taxes common in Europe or the general income tax in the United States. Dependence on taxes of this type means that the government’s fiscal resources rise and fall with economic prosperity. Policies that shrink the economy diminish tax revenue.

The main implication is clear: widespread rent-creating policies destabilize an incumbent coalition. These policies significantly shrink both the economy and tax revenue, so the coalition cannot maintain the current pattern of benefits and must therefore cut back on expenditures, harming constituencies who benefit from these expenditures. The fiscal interests of political officials force them to be concerned with economic prosperity even if this is not their principal goal. Incumbents in open access orders have strong incentives to maintain prosperity, and the evidence suggests that failing to do so turns them out of office (Kramer, 1971; Tufte, 1978). Furthermore, as Bueno de Mesquita et al. (2003) suggest, the turn toward massive rent-creation is politically inefficient in mass electorates; political leaders do far better gaining votes with public goods (education, social insurance) than with private goods (rent-creation).

4.7.2 Market Competition

Thriving market economies also facilitate the stability of open access orders, democracy in particular, in a surprising number of ways. By studying democracy in isolation of markets, political scientists have missed these forces of political stability. Most obviously – and this effect political scientists have long known – competitive markets provide the most powerful means for long-term economic prosperity. Evidence from across a range of political systems shows that they are more stable when they are more prosperous and that incumbents are more secure in power when they provide for prosperity (Haggard and Kauffman, 1995; Kramer, 1971; Londregan and

12For explicit discussion of fiscal interest see Wallis, Sylla, and Legler (1994) and Weingast (2006b); for more general discussion of fiscal effects see Tiebout (1956) and Oates (1972).

Poole, 1990; Tufte, 1978). Because open access orders provide for thriving markets, they produce prosperity over the long term in ways that natural states cannot match.

More subtly in its effects for political stability, the price mechanism facilitates pluralism, civil society, and party competition. Prices in competitive markets reflect marginal cost. This means that a change in one policy domain ripples through the economy, for example, by changing prices in other markets. The larger the change in other policy domains induced by the original policy change, the bigger the likely response of interests from other domains back into the area of the original policy domain. Competitive markets therefore combine with open access to organizations to facilitate monitoring of governmental policies and coordination against adverse policies by the government. The absence of competitive markets inhibits this signaling and response effect.

Another feature of open access markets reflects the idea that this order widely shares the gains of the market economy: when one sector of the economy experiences significant improvements and expansion, the dynamic aspects of the economy mean that the effects are felt throughout the economy. If the expanding sector employs a significant portion of the workforce that raises wages, for example, then factor price equalization raises wage rates in other parts of the economy, resulting in a greater sharing of the gains of economic growth. Incomplete and heavily controlled markets in natural states inhibit this effect. The same effect holds for productivity gains produced by open access markets. As labor productivity increases, so too do wages.

International competition among open access orders represents another set of forces helping to sustain these societies.13 First, an open access order that imposes rent-creation policies with high costs on the economy gives its international competitors a market advantage. This competition produces a feedback effect: the country must decide if the policy benefits are worth the economic price. This feedback effect is especially important in small trading states that finance much of governmental spending from taxes related to the trading sector. Because these effects are felt quickly, they help protect the competitive sector in small trading states.

For example, with market integration in Europe, an aging workforce, the growth of globalization, and the growth of service economies, many

13The effect of international competition requires international openness. Periods in which some open access orders insulated themselves from international trade dampened this effect.

European states have tempered their market controls, macroeconomic management of their economies, and aspects of social-welfare policies. Across Western Europe, social democratic parties have moderated their programs and outlooks from those of the 1970s and 1980s but also have been innovative in the adaptations of their programs to the new realities of the 1990s and the 2000s (Garrett, 1998; see also Berman, 2006; Prasad, 2006), as illustrated by the transformation of the Labour Party under Tony Blair. The Nordic countries – among the most innovative social democracies in the 1960s and 1970s – have experienced considerable reform. As Lindert (2004, Ch. 11) observes, much of the Swedish reform has focused on macroeconomic management and tax policy rather than on reform of the welfare state. Garrett (1998) makes a similar argument for Western Europe more broadly.

The second effect of international competition involves violence and war. As the two world wars and the Cold War of the twentieth century illustrate, external violence is a central if episodic aspect of the international environment. To survive, open access orders must have the ability to succeed, not only in economic competition but also in violent competition (Ferguson, 2002; Schultz and Weingast, 2003; Tilly, 1992). Without this ability, they risk succumbing to the ambitions of authoritarian states. Had the Nazis succeeded in World War II, for example, then open access orders would be unlikely to dominate the world today, and all of Europe might remain authoritarian.14 The success of open access orders in World War II and the Cold War demonstrates the need for these states to maintain economic, military, and adaptive superiority, or else risk being taken over or dramatically challenged by aggressive, powerful natural states. This risk remains today, as international terrorism and the events of 9/11 emphasize.

Violent international competition also tempers policymaking in open access orders, especially during periods of intense competition. The European willingness throughout the Cold War to cooperate with the United States illustrates this. The Soviet armies to the east, including their dominance by force of Eastern Europe, not only fostered cooperation through NATO but U.S. aid also helped foster market reform in Western Europe. U.S. aid often depended on market reform; for example, the famous Marshall Plan after World War II required as a condition that the countries of Western Europe lower tariff barriers to one another, create a realistic plan for macroeconomic management, and join a new organization for economic cooperation called the Organisation for Economic Co-operation

14Ironically, it took an alliance between the open access orders (the United States and Great Britain) and a limited access order (the Soviet Union) to defeat Germany in World War II.

and Development (OECD). Aid focused on market economies for providing prosperity in part as a means of making socialism a less attractive alternative.

International military competition has two closely related effects. The first is economic: thriving markets in open access orders provide the resource base from which these societies sustain long-term international struggles with hostile rivals. Open access orders that compromise their economies also compromise their ability to survive against hostile international rivals. The second is institutional: open access orders have the ability to make credible promises. With respect to sovereign debt, this ability allows open access orders to borrow heavily in times of need. Borrowing leverages a society’s resources so that it may spend well beyond what it can raise in taxes. Borrowing and paying back the bonds over a thirtyor fifty-year horizon allow the society to “tax-smooth”; that is, to distribute the economic burden of the conflict through taxes over a much longer period, thereby greatly lowering the total deadweight losses from taxes (Barro, 1979). This contrasts with natural states’ more limited ability to borrow; these states must rely more heavily on current taxes to finance their wars. Because they tax more heavily in times of great need, the associated tax burden and deadweight economic losses are necessarily high. As Schultz and Weingast (2003) show, borrowing facilitated open access orders’ success in several multigeneration conflicts with natural states, including the Anglo-French-American rivalry with Germany (from the late nineteenth century through the end of World War II) and the Cold War between the United States and its allies and the Soviet Union (from the end of World War II through the collapse of the Soviet Union in 1991).15

A closely related effect is political: to create thriving markets, especially in the areas of early modern Europe moving to the doorstep and then making the transition, states had to create various forms of credible commitments to establish rights and rule of law, first for elites, and then for the whole citizenry (North and Weingast, 1989). These institutions created the new constitutional institutions underlying the emerging open access

15Moreover, these international effects are not limited to the twentieth century. Over the last three to four centuries, the West has experienced four sustained rivalries for dominance. In addition to the two mentioned, we include the Hapsburgs’ drive to dominate Europe, resulting in the Dutch Revolt (1570–1640s); and the more than the century-long Anglo– French rivalry that ended with the defeat of Napoleon (1689–1815). In all four of these competitions, the open access order (or its doorstep and transitioning precursors in the Dutch and British cases) succeeded, in part because it had more efficient systems for mobilizing resources for international conflict than do the more personalistic natural state systems (Schultz and Weingast, 2003; Tilly, 1992).