orders of Western Europe, providing for open access in both politics and economics.

4.7.3 Implications

All states, open access orders included, face pressures for rent-creation. Political officials are tempted to create rents as a means of solidifying their positions and locking out their opponents. However, access and competition work against attempts to create rents in an open access society. Absent a constitutional coup that dramatically and quickly changes the rules of the game, too much rent-creation by the incumbents gives the opposition a competitive advantage: economically, it typically leads to fiscal constraints and declining prosperity; and politically, it grants the opposition the Schumpeterian basis to launch effective campaigns against the incumbents as they have ruined the means of prosperity. Open access to organizations fosters this outcome, as the opponents of those gaining rents support the opposition in its attempts to undo the new rent-creation policies.

This outcome reflects the virtuous circle of competition and open access. Political and economic competition combine: governments that fail to provide prosperity and public goods and services valued by citizens are punished by shrinking economies, lower tax revenue, the exit of mobile factors, and opposition parties that seek to unseat them.

4.8 Forces of Long-Run Stability: Adaptive Efficiency

All societies face the problem of how to survive in the face of uncertainty, the never-ending set of new challenges, dilemmas, and crises. The sources of these challenges are varied: changes in relative prices, demographic change, macroeconomic crises, ethnic conflict, civil wars, technological change, and security conflicts with other states.

Competition in open access orders to address major social problems fosters adaptive efficiency, the ability of the society to survive in the face of an ever-changing array of problems and difficulties (Hayek, 1960; North, 2005; Ober, 2008). Schumpeterian competition provides political and economic entrepreneurs with incentives to devise better and more attractive solutions to their society’s problems.

Open access orders exhibit dynamic stability for two reasons. The first follows from open access and competition, which promote solving new problems. Open access and the free flow of ideas generate a range of

potential ways to understand and resolve new problems. The larger the problem faced by the society, the more extensive is both the debate about the nature of the problem and the set of potential solutions. Individuals and organizations affected by the problem have incentives to invest in creating and advertising new solutions to problems. Political parties, interest groups, and organizations all compete to solve major problems and address crises. Those in power seek solutions to help them remain in power. Opposition parties and their support groups have strong incentives to expose the weaknesses in the incumbent’s proposals and to devise more attractive alternatives. The larger the problem, the more individuals and organizations are affected by it, and the more widespread public input and discussion. The free and open expression of ideas means that many ideas will be heard. In their quest to maintain or to regain power, competing parties will draw on this competition for solutions, seeking ideas that further their interests.

This process is far from perfect; indeed, it is often a mess. Nevertheless, in comparison with natural states, open access orders more readily generate a range of solutions to problems; they more readily experiment with solutions to problems; and they more readily discard ideas and leaders who fail to solve them. For example, parties in power attempt to devise a program that they believe addresses the problem in a way that matches the interests of their constituents. If this program fails to resolve the problem, citizens can vote out the incumbents and bring in the opposition. The more attractive the opposition’s program, the more likely is partisan turnover. If the incumbent party biases its reaction to benefit its constituents rather than to solve the problem, it grants its opponents a competitive advantage in the next election.

This experimental process is imperfect, in part because of the fundamental uncertainty about the nature of the problem and in part because of voter ignorance. Nonetheless, experimentation provides the best opportunity for open access orders to persist. In comparison to the absence of open access or competition in authoritarian natural states and the more hobbled version of electoral competition in many natural states, competition to solve problems in open access orders works reasonably well. The aggregation of information and ideas in the open access’s free society gives these countries strong advantages over natural states in searching for solutions to problems. Limited access in natural states places limits on the range of individuals, groups, and organizations that participate in devising and debating new solutions; they also have many fewer mechanisms to allow the replacement

of ideas and leaders, so experimentation works less effectively in these societies.16

The second reason for dynamic stability is the ability of open access orders to provide credible commitments. Political conflicts arise in all societies, for example, between rich and poor, agriculture and industry, workers and firms, and among different regions. The ability to make credible commitments in open access orders combines with this order’s ability to deliver impersonal benefits to widen the set of feasible solutions to conflicts. Open access orders therefore more readily address these conflicts without disorder. For example, students of Western Europe argue that explicit incorporation of labor allows credible commitment to policies that solve budgetary problems in times of fiscal stress. In contrast, Spiller and Tommasi (2007) in their study of Argentina show that this inability plagues natural states’ ability to solve similar problems.

All open access orders have faced this type of political conflict, and all have provided for political solutions that alter policy in ways that accommodate, to varying degrees, both sides. These are often called “pacts” in the literature (Burton, Gunther, and Higley, 1992). For example, the United States solved four major crises in the nineteenth century with pacts: the Compromises of 1820, 1833, 1850, and 1877, all major changes in the rules of the game that resolved political crises. Similarly, the Revolution Settlement of the Glorious Revolution (1689) and the various Reform Acts in nineteenth-century Great Britain (the subject of Chapters 5 and 6) were all pacts that resolved political conflicts. In contrast, the more limited ability to make credible commitments in natural states makes the set of feasible compromises smaller. These states cannot as readily endow policy solutions with credible commitments, so pacts are less likely to succeed. Conflict is therefore more likely to result in disorder.

Several other features of open access orders also contribute to this order’s greater resiliency to crises. First, entrepreneurs in market economies seek to discover and exploit new niches. Some problems faced by natural states never become problems for open access orders because markets emerge to solve or mitigate them. Second, open access orders face fewer problems than do natural states, in part because natural states face far more self-induced problems, such as macroeconomic imbalances that cause regime instability. Very few open access orders have experienced hyperinflation, whereas large

16Ober (2008) explores similar ideas to those in this paragraph in the context of democracy in ancient Athens.

portions of modern natural states have. Third, as we have noted, the ability to provide benefits on an impersonal basis means that open access orders can provide far more public goods than natural states. Here too the wider range of policy flexibility implies that an open access order can solve certain problems through policy changes.

4.8.1 Sources of Change in Open Access Orders

Open access orders exhibit many sources of change. The two reasons underlying dynamic stability – experimentation and credible commitments – combine with uncertainty and the never-ending set of new problems to imply that open access orders exhibit regular, if episodic change. In Chapter 2, we explained how natural states are stable but not static. They too face a never-ending source of new problems and challenges. Yet their more limited ability to address these problems – to generate appropriate solutions and to endow these solutions with credible commitments – means that the dominant coalition is much less stable. In comparison with open access orders, these societies exhibit far more disorder in the form of coups, political turmoil, macroeconomic instability, civil wars, and ethnic conflict. Our discussion in Chapter 3 of medieval England illustrated this process of the natural state being stable but not static.

The varying reactions to the Great Depression of the 1930s illustrate this point. Although the depression created political problems in every open access order, the reactions were far less severe than in many natural states. In Latin America, for example, several of the major states experienced political disorder and military coups, including Argentina and Brazil. Yet the major open access orders, such as Britain, France, and the United States, were able to experiment with new policies that responded to citizen interests without disrupting these orders.

The political history of every open access order is punctuated by crises and the forces creating or limiting the types of ways that society can address the crises: wars; mass markets for agricultural products; huge atomistic labor markets facing large firms; ethnic, racial, and religious issues; and recessions and depressions.

A second source of dynamics is Schumpeterian competition. This competition means that markets continually evolve, creating new firms, products, and patterns of consumption. This evolution changes the range of interests in society. These changes combine with the positive responsiveness of an open access order’s political institutions to imply that policies will adjust as interests change.

4.9 Why Institutions Work Differently under Open Access than Limited Access

All natural states have some markets and a degree of the civil society; their governments face fiscal incentives and mobile factors of production; and many have elections and competitive parties. If these institutions are present in natural states, why do they produce different outcomes in open access orders? This issue is especially puzzling in the context of democracy because the tendency in both the recent academic literature and the popular press is to identify democracy with elections.17

The answer is that the same institutions work differently in the presence of open access and competition than under limited access and the absence of competition. Consider the political system. Many mature natural states have elections and party competition, and contemporary political scientists typically consider them democracies in the same way as the open access orders of Western Europe, the United States, and Japan. However, elections are not the same across this divide, and we cannot lump them together as a single category called democracy.

Mature natural states may have elections and party competition, but they lack a wide range of institutions that support open access democracy in ways that are simply missing in natural states.18 Mature natural states do not have open access to organizations, so they typically have a weak civil society where a wide range of organizations can represent and mobilize the interests of their members. Many natural states impose restrictions on the competitive party process, making it difficult or impossible for the opposition to organize, field candidates, or use the press. Their limited ability to provide impersonal benefits means that natural states cannot sustain public goods and social insurance programs that share widely the benefits of the market economy in ways complementary to markets. These states are therefore much more subject to populism and policies that create macroeconomic imbalances and budgetary crises, as is common throughout Latin America, most recently in the 1998–2002 crises throughout the region. The economic effects in natural states differ from those in open access orders. For example, natural states tend not to rely on broad taxes on the economy so that the fiscal

17See, e.g., Przeworski et al. (2000) and Barro (1999) for standard views in political science and economics, respectively.

18More than a generation ago, Dahl (1971) provided a multidimensional definition of democracy, which he called polyarchy, listing a wide range of factors beyond elections necessary for successful democracy. This compares with the definition more common in the literature today.

interests of the government do not reflect the state of the economy in the same way as in open access orders.19 Similarly, limited access inhibits market competition sufficiently that these states tend to insulate themselves from the effects of mobile resources and international competition. In short, natural states short-circuit the open access and competitive mechanisms that provide for the virtuous circle in open access orders so that, although they may have elections and party competition, these institutions do not work in the same way that they do in open access orders.

The inability to provide impersonal benefits has another debilitating effect on natural states. Not only does this mean that courts are typically corrupt, but that natural states cannot implement legislation allocating benefits according to impersonal criteria. In the open access orders, legislation provides details about how laws are administered; for example, that a person recently unemployed is to receive benefits of a certain amount for a certain duration. In these states, impartial, rule-of-law courts impose penalties on the executive for failing to implement the laws according to the provisions specified in the law. Not so in the typical natural state. Instead, corrupt courts do not constrain the executive; moreover, the legislature rarely – and rationally – undertakes the job of writing detailed provisions to constrain the executive, leaving the executive great freedom to allocate the funds as desired. Evidence from Latin America suggests that social programs serve immediate political goals, such as reelection, rather than their intended purposes.

These points combine with the central logic of the natural state. The natural state’s use of privilege and rents to maintain the dominant coalition necessitates limited access that prevents an opposition civil society capable of policing the government. For example, many natural states grant governmental employees, unions, and teachers privileged positions with above-market wages and with various rights to jobs that insulate them from market forces. In contrast to social insurance policies of open access orders, this form of policy to benefit workers reduces the incentives to invest and even to work (indeed, the evidence in many of these countries is that employees in these categories often do not work at these jobs, but have second jobs). Many mature natural states pursue populist policies that are far more detrimental to their economies than are the social insurance policies of open access orders.

19For example, Putin in Russia focused on economic reform as a means of gaining economic resources necessary to become more powerful, but once it became clear that oil prices would continue to rise, he abandoned reform (Goldman 2008; Kurov, 2008).

and services associated with markets and economic growth. The literature on democracy provides another example. Modern students of democracy overemphasize elections as the singularly essential feature of democracy. Although obviously necessary for open access democracy, elections alone fail to capture the broader context of democracy. Most cross-country studies of democracy fail to make the distinctions we emphasize. Thus, Argentina, Brazil, Mexico, and Russia all have elections, but these elections do not make them open access orders.

To summarize, many natural states have some of the features and institutions of economic and political competition, but neither system works the same as in an open access order. Markets in natural states have far less access and are subject to far more explicit privilege and rent-creation, so they are significantly less competitive. Prices frequently do not reflect marginal costs. The same holds for electoral competition. Many natural states have elections and opposition parties, but they do not have open access competitive democracy, which works very differently. Restrictions on the competitive process (hindering the opposition’s ability to organize and compete), limited access to organizations, and a stunted civil society all hinder the competitive process. Similarly, the absence of competitive markets also reduces the salutary effects of fiscal incentives and mobile resources facing governments. Natural states cannot create the virtuous circle of open access and competition.

4.10 A New “Logic of Collective Action” and Theory of Rent-Seeking

The theory of open access orders provides a new approach to the “logic of collective action,” one that turns both Olson (1965, 1982) and public-choice theorists studying rent-seeking (Buchanan, Tollison, and Tullock, 1980) on their heads. Both sets of scholars emphasized the pernicious effects of organized interests. Olson’s (1965) logic of collective action involves a bias in interest group formation: in comparison with diffuse interests, concentrated interests are more likely to form. He argued that this bias allows the former to capture policy benefits at the expense of the latter. Although Olson (1982) argued that encompassing groups could push the state toward greater benefits for citizens, he emphasized that interest group influence eventually hampers all states; echoing Thomas Jefferson, he suggested that countries needed periodic revolutions to counter the negative influence of interest groups. Similarly, scholars emphasizing rent-seeking hold that political officials respond to concentrated interests by providing policy benefits that create privilege, exclusion, and rents.

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Undoubtedly, considerable policymaking in all open access orders reflects this logic.

Nonetheless, both approaches fail to capture the essence of open access orders. Competitive markets in open access orders survive, despite the continued growth in the number and size of large, well-organized interests. Europe, United States, Japan, and several commonwealth countries have all long been characterized by open access market economies. Neither Olson nor the public-choice, rent-seeking scholars can explain the long-standing survival of open access markets and competition in the face of organized interests that comprise the civil society. Nor can either approach explain why rent-creation is so much more central to natural states than open access orders.

Our framework suggests a different view. Organizations are the lifeblood of both political and economic competition. They are the vehicles through which economic and political entrepreneurs implement their ideas and affect the dynamics of the economy and the polity. Moreover, as we suggested in our endogenous approach to pluralism, Olson and the rent-seeking scholars ignore the idea of an equilibrium set of politically active groups. Yes, many active interest groups gain policy benefits and rents, but Olson’s approach fails to understand the potential for a much wider range of interests to form in opposition to systematic attempts to dismantle an open access order through privilege and rent-creation. Olson also ignores the ability of political institutions to reflect the interests of unorganized groups. When too many rents threaten an open access order, the opposition party has Schumpeterian incentives to make this a central issue, publicizing this problem and advocating its eradication.

Most organizations seek rents, and some (especially a few pivotal constituencies, such as farmers) succeed in gaining policies that provide them with government-run cartels, subsidies, and rents. However, that side of the story misses that organizations are also the chief reason why the vast majority of markets are not cartelized despite producers being more concentrated than consumers and why the extension of privilege does not dominate open access orders and transform them into limited access orders. Without open access to organizations and the subsequent civil society, the citizen reaction underlying the consensus mechanism would not work nearly so well; policing the constitution and the society’s structure and process would be far more difficult.

Indeed, one of the principal purposes of open access orders is to unleash the power of organizations. Galbraith (1956) provides an important insight into the operation of modern open access orders with his idea of the