7.1 The Framing Problems

have an answer to these questions, although we acknowledge their importance.

We have made progress in understanding how societies deal with the unending and dynamic process of change that goes on in every society. To be clear, a dynamic theory of change is not necessarily a theory that implies growth or development. The response to changing conditions often produces change without progress. Historical experience suggests that neither societies nor social scientists deal very well with the problem of persistent change and endless novelty. Natural states possess some social resources to deal with change, but the long-run history of human societies before the last several centuries paints a dim picture of the ability of societies to overcome all the changes and problems they face. Recorded human history is largely a history of rises and declines of civilizations. Gregory Clark (2007b) recently reiterated what economic historians have long known: over the long period of time stretching from the discovery of agriculture to the beginning of the nineteenth century, the long-run rate of economic growth per capita has been extremely low, almost zero. For every episode of economic growth, there has been a corresponding episode of economic decline. As Table 1.2 in Chapter 1 showed, poorer societies in the modern world are not poor because they suffer from low growth rates when they grow, but because the share of years when they experience negative growth and the intensity of the negative growth experience are so much greater than in the developed world. Over the last two centuries, sustained economic growth results from the reduction of negative shocks to social output rather than a marked increase in the rate of growth in years when output is growing.

The world has always been an uncertain place. The radical transformation of some societies over the last two centuries lends credence to the idea that open access societies are better at constructing effective responses to novel problems. We have tried to explicate why open access societies enjoy a greater degree of adaptive efficiency: an institutional framework that encourages trial and error so that in the face of Knightian uncertainty successful adaptations remain while failures tend to disappear. Although never unerring in their response to an uncertain world, the history of open access societies is replete with experimentation leading eventually to solutions. Creative political and economic destruction is the norm in open access societies. Such experimentation is precisely in the spirit of Hayek’s (1952) optimistic views on the consequences of entry and competition. Adaptive efficiency entails the creation of institutions and organizations that encourage experimentation, reward successful innovation, and, equally important, eliminate failures. There is clearly no guarantee that humans

will find solutions to the new and novel problems that we will confront in the future, but some sets of social institutions and organizations make it more likely we will do so.

We have learned enough about institutions to realize that they are imperfect vehicles to solve problems (Eggertsson, 2005). Human societies never manage to solve the problem of violence completely, although some have developed more effective ways of constraining it than others. The emergence of natural states beginning ten thousand years ago dramatically expanded the range of institutions and organizations that societies could support. The use of rent-creation to constrain the use of violence enabled the creation of much larger societies capable of supporting larger populations, urban agglomerations, and significant technological change. Natural states, however, have inherent limits to the type of social arrangements that can be supported: anything that threatens rent-creation may eventually threaten the provision of order. Rent-creation and limited access place limits on the long-term economic growth of natural states, limits that became glaringly apparent over the last two centuries in comparison to open access societies.

Open access orders appear to be better at coping with change over the long run. Decision makers in an open access society are widely decentralized and include leaders in economic and political organizations. They reach decentralized decisions within the organizations they represent. Open access increases the possibility of stumbling onto better policies that solve or mitigate problems. Creative destruction in both the economic and political realm appears to be a necessary requirement for adaptive efficiency. Schumpeter’s failure to imagine creative political destruction led him to conclude that capitalism was ultimately doomed to failure. Perhaps he will ultimately be proved right: open access social orders may turn out not to be sustainable in the same way that natural states have been sustainable for ten thousand years. Nonetheless, the durability of the open access society in the face of ubiquitous efforts to create rents is testimony to the crucial role of adaptive efficiency.

Natural states cannot rely on adaptive efficiency as a bulwark to deal with change. In a dynamic world, decision makers in limited access societies are constrained in their ability to exploit new opportunities and develop solutions to new problems by the desire of elites to protect their privileges and the dangers that reducing rents pose to the stability of the dominant coalition and society at large. Limits on competition in both economics and politics reduce innovation, creative destruction, and the ability to replace losers and discard bad ideas. It is not that natural states are incapable of progress; it is that they are as likely to move back toward personal arrangements

and more limited access as they are toward impersonal arrangements. Even when societies perceive the benefits of open access, natural state coalition members perceive that simply adopting open access institutions would not only destroy their rents but would also fail to produce the desired outcome of sustained economic development.

We recognize that we have grappled incompletely with the need to comprehend the sources of beliefs, the origin of institutions, and the nature of human organizations that comprise the different social orders. However, our story does have profound implications for the incentives to increase the stock of human knowledge and everything to say about the degree to which societies could exploit that knowledge both to improve the human condition and to deal with the potential increase in the deadliness of violence.

7.2 The Conceptual Framework

In the foraging order, exchange occurs mainly through face-to-face repeated interaction; all relationships are personal. The typical size unit of human interaction is the band of about twenty-five people, with larger groups forming temporarily and sporadically. The foraging order deals with violence imperfectly through the formation of groups in which personal interaction occurs among individuals who know each other well and interact repeatedly. The level of violence within and between groups can be very high.

The natural state builds on the personal relationships of the foraging order and is able to expand beyond the scale of simpler societies. Personal relationships in natural states build on traditional face-to-face interaction, but hierarchies of elites form personal relationships that extend the control of the dominant coalition. Limited access orders provide a solution to violence by embedding powerful members of society in a coalition of military, political, religious, and economic elites. Elites possess privileged access to valuable resources or valuable activities and the ability to form organizations sanctioned by the larger society. Unique elite identities are closely tied to the privileged organizations that elites head or participate in. Because elite rents are reduced if violence breaks out, rent-creation enables elites to credibly commit to each other to limit violence. However, because peace depends on the balance of interests within the dominant coalition, limited access orders are sensitive to changes that alter elite interests and capabilities. The limited access order is stable as a social order, but each natural state is subject to constant change; and because natural states rely on an interlocking system of elite interests, they are not always robust to changing circumstances. In well-developed natural states, elite privileges include control over powerful

social organizations, such as the church, governments, courts, and military units.

The open access order builds on the organizational achievements of the natural state but extends impersonal citizenship to an ever-growing proportion of the population. All citizens are able to form economic, political, religious, or social organizations to pursue any number of functions. All open access orders proscribe the use of violence by organizations other than the military or police. Unlike the natural state, which actively manipulates the interests of elites and non-elites to ensure social order, the open access order allows individuals to pursue their own interests through organizations. Individuals continue to be motivated by economic rents in both political and economic markets, but the presence of open entry induces competition, which tends to make such rents temporary. Social order is maintained through the interaction of competition, institutions, and beliefs. Control of the military is concentrated in government, and control over the government is subject to both political and economic competition and institutional constraints. Attempts to use government to coerce citizens either directly through the use of military force or indirectly through the manipulation of economic interests result in the activation of existing organizations or creation of new organizations to mobilize economic and social resources to bid for control of the political system. Maintaining open access is critical to sustaining the social order.

Both limited and open access orders are dynamic and subject to continuous and often unexpected change. This dynamism is not progressive; no teleological movement pushes societies to become more complex, more stable, or more developed. The dynamism is change, constant change. In the simplest terms, what distinguishes the dynamics of limited access from open access orders is the way the social orders use access to limit violence and provide order. Natural states respond to change by manipulating access and reallocating rents within the dominant coalition. In contrast, the greater stability of open access orders does not stem from greater rigidity in social arrangements but from the opposite, from more fluid social arrangements that respond more flexibly to changing conditions. Open access orders are more robust to changes because their internal institutional and organizational structures are freer to adjust to and accommodate change within a much wider range because rent creation is not actively used to limit violence. Both social orders are dynamic, but the internal logic of their dynamism differs.

How is the transition made from one social order to another? In the previous chapter, we outlined the transition to open access orders in Britain,

France, and the United States. While the transition in each society depended on specific features of that society, there are common features to the transition. The doorstep conditions made it possible for elites to deal with each other impersonally, to reduce the incidence of disruptive violence, and ultimately to create and sustain impersonal elite rights. In each case, elites faced incentives to transform privileges into impersonal rights. The creation of a few elite rights under the doorstep conditions opened an opportunity to extend elite rights in a way that was credibly sustained by the entire elite. The privilege of owning shares in a joint-stock company, for example, may begin as a unique privilege. However, if that privilege becomes widespread and shares are transferable, then an elite interest in supporting impersonal exchange of shares may grow. Impersonal exchange in shares, in turn, may create an interest in impersonal formation of companies, forces that clearly came to the fore in all three countries in the nineteenth century. Open access to corporate forms becomes credible when large numbers of the elite benefit directly. In a similar way, open access to political organizations can be sustained when powerful groups in the polity find it in their interests to support political parties.

The transition is about institutionalizing open access via impersonal relationships, not about adopting specific institutions, such as a bill of rights or the universal franchise. Institutions matter because they structure the incentives and constraints facing individuals. However, as we have demonstrated, the same institutions work differently in different circumstances, particularly in the absence or presence of open access. Elections and corporations, for example, work differently in natural states than in open access orders.

This way of thinking about the transition process results in a new interpretation of the economic and political history of the birth of modern open access societies at the end of the eighteenth and the beginning of the nineteenth centuries. Our economic history emphasizes the concern about the development of powerful new forms of elite economic organizations and the “corrupting” effect of these organizations on politics that led to the acceptance of open access in the mid-nineteenth century. Our political history emphasizes modifications to natural state institutions in the eighteenth century that led to concerns among elites that intra-elite political competition would inevitably lead to consolidated political control by a faction that maintained control through manipulation of the economy. Ultimately, elites moved to protect their privileges by converting them into rights through institutions that guaranteed open economic and political competition by allowing the formation of economic and political organizations