organized effort, we begin with the problem of structuring the internal relationships among the individuals who make up the organization of (potential) enforcers. The first problem in limiting violence is to answer the question: How do powerful individuals credibly commit to stop fighting? Our answer forms the basis for this book and, we believe, a new conceptual framework for the social sciences. Controlling violence depends on the structure and maintenance of relationships among powerful individuals.

1.3 The Logic of the Natural State

The natural state reduces the problem of endemic violence through the formation of a dominant coalition whose members possess special privileges. The logic of the natural state follows from how it solves the problem of violence. Elites – members of the dominant coalition – agree to respect each other’s privileges, including property rights and access to resources and activities. By limiting access to these privileges to members of the dominant coalition, elites create credible incentives to cooperate rather than fight among themselves. Because elites know that violence will reduce their own rents, they have incentives not to fight. Furthermore, each elite understands that other elites face similar incentives. In this way, the political system of a natural state manipulates the economic system to produce rents that then secure political order.

The dominant coalition contains members who specialize in a range of military, political, religious, political, and economic activities. It is, however, easier to understand how a dominant coalition functions if we begin with military specialists and then return to the full coalition.22 Imagine a world where violence is endemic and the population is made up of many small groups with no well-organized governments or military forces. Some individuals specialize in violence, but all individuals must stand ready to defend their rights by force of arms. The violence specialists may provide protection to a small group of clients, but the biggest threat facing the specialists is one another. If they try to agree to disarm, the first specialist to put down his or her arms risks being killed by the other. Thus, it is an equilibrium outcome for both specialists to remain armed and continue fighting.

In order for one specialist to stop fighting, he or she must perceive that it is in the other’s interest not to fight, an expectation that both specialists

22The following discussion is not intended to describe how natural states arose historically; we do not possess sufficient historical information to trace the specific development of the first natural states.

must share about each other. Only if the cost of fighting or the benefit from not fighting is tangible and clear to both specialists will they believe that not fighting is a credible outcome. The stylized solution involves the two specialists agreeing to divide their world into two parts, one controlled by each specialist, and then to recognize each other’s rights to control the land, labor, resources, and trading within their sphere. The specialists do not disarm, but if their land, labor, and resources are more productive in the absence of violence then this arrangement creates an additional cost to fighting; herein lies the solution to the credible commitment to nonviolence. If each violence specialist captures a larger economic return (a rent) from the land, labor, and resources he or she controls when there is peace and if those rents are large enough, then it is possible for both specialists to credibly believe that the other specialist is better off by refraining from fighting. A rent is a return to an economic asset that exceeds the return the asset can receive in its best alternative use.23 To the violence specialists, the rents from peace are the difference in the returns their assets earn when they do not fight compared to the returns they earn when they do fight. Although one specialist may be tempted to defect today, his or her repeated interaction makes it in his or her interest not to fight over the long term.

To be credible, the commitment requires that the violence specialists be able to mobilize and gather their rents, which are produced by the remainder of the population. Mobilizing rents, in turn, requires specialists in other activities. It is here that we move away from the simple ideas about violence and back toward a more reasonable depiction of the logic of the natural state. In the earliest societies of recorded human history, priests and politicians provided the redistributive network capable of mobilizing output and redistributing it between elites and non-elites.24 In a natural state, each of the nonmilitary elites either controls or enjoys privileged access to a vital function like religion, production, community allocation of

23If a person is willing to work at a particular job for $10 an hour, but not for $9.99 an hour, and is paid $15 an hour, she receives a rent of $5 an hour. Rents depend not only on observable returns, such as the $15 an hour, but also on the value of the best alternative foregone. In this case, the equivalent of the $9.99 the person could have gotten by working another job or consuming leisure. Because the value of the best alternative is never observed, measuring rents requires particular circumstances in which choices are made. What makes rents different from observable returns is that they accrue only to persons doing the specific activity. So the rents from peace accrue to the violence specialists only if they are not violent.

24We consider the formation of the earliest state, all of which were theocracies, in Chapter 2; also see Steckel and Wallis (2006).

resources, justice, trade, or education.25 Because the positions, privileges, and rents of the individual elites in the dominant coalition depend on the limited entry enforced by the continued existence of the regime, all elites have incentives to support and help maintain the coalition. Failing to do so risks violence, disorder, and the loss of rents.

Elite organizations generate and distribute rents to the coalition. Among the most valuable sources of elite rents is the privilege of forming organizations that the state will support. By devising ways to support contractual organizations and then extending the privilege of forming those organizations to their members, the dominant coalition creates a way to generate and distribute rents within the coalition as well as a credible way to discipline elites because elite organizations depend on the third-party support of the coalition. The ability of elites to organize cooperative behavior under the aegis of the state enhances the elite return from society’s productive resources – land, labor, capital, and organizations.26

The incentives embedded in these organizations produce a double balance: a correspondence between the distribution and organization of violence potential and political power on the one hand, and the distribution and organization of economic power on the other hand. The idea of the double balance suggests not only that all of the social systems in a society must have an internal balance of interests but also that the political, economic, cultural, social, and military systems must contain compatible systems of incentives across the systems if a society is to remain stable.

Because the dominant coalition in any natural state is an adherent organization, peace is not inevitable: peace depends on the balance of interests created by the rent-creation process. Violence and civil war are always a possibility. Military specialists do not disarm; indeed, they must maintain their military strength both to balance one another’s power and to overawe their respective clients. Dispersed military power is part of the logic of the natural state. In this way, the threat of violence becomes part of the arrangement that controls the actual use of violence.

25The various elite functions are often integrated, and critical individuals in the coalition may play more than one role, as did the kings in the ancient Chinese states who were simultaneously the military leader, the political leader, and the chief shaman (e.g., Chang, 1983, pp. 35, 45).

26Most elite organizations are not purely political or military, but integrate economic, religious, judicial, and other functions. A good example is the feudal manor, which is an organization that enables the coordination of production, justice, landownership and use, education, and religion.

Natural states are stable, but not static, and no dominant coalition is permanent. Societies face unexpected shocks and changes that can destabilize the internal relationships within the dominant coalition. Internally, policies and decisions made by leaders result in unintended consequences that change the circumstances facing the coalition. Leaders and coalition members are never completely sure of the full implications of their actions, and periodically they make serious mistakes. Externally, unpredictable changes in relative prices, climate disasters, bumper crops, technological change, and newly hostile neighbors are part of the world. All societies are subject to random and unexpected shocks. In natural states, the changes may affect the distribution of violence potential and require a renegotiation of the distribution of privileges and rents within the dominant coalition as well as changes in the membership of the coalition as new powerful interests arise and old interests weaken. If particular violence specialists grow stronger relative to the others, for example, they are likely to demand a larger share of privileges and rents. If these negotiations fail – when the groups with violence potential misjudge one another’s capabilities – violence is likely, including civil wars (e.g., Biafra against the rest of Nigeria, Bangladesh against the rest of Pakistan), ethnic violence (e.g., the former Yugoslavia, Rwanda), or coups to prevent particular policies of democratically elected governments (e.g., those in Chile 1973 and Spain 1936).

Despite their fundamental similarities, natural states differ in many ways. Their history is rich and variegated and, as we discuss in Chapter 2, natural states appear in many different manifestations. We develop a simple taxonomy of natural states that reflects the ability of different types of natural states to support organizations. Fragile natural states are unable to support any organization but the state itself. Basic natural states can support organizations, but only within the framework of the state. Mature natural states are able to support a wide range of elite organizations outside the immediate control of the state. The ability to support organizations – to structure human interaction – is an important determinate of the economic and political development within the natural state.

1.4 The Logic of the Open Access Order

Open access orders control violence through a different logic than the natural state. These societies create powerful, consolidated military and police organizations subservient to the political system. All open access

societies satisfy the Weberian assumption: their states possess a monopoly on the legitimate use of violence. Consolidation of violence carries the danger of the state using violence for its own ends. As a result, the logic of controlling violence in the open access order involves three elements: 1) consolidated organization of military and police forces is subject to the control of the political system; 2) the political system must be constrained by a set of institutions and incentives that limit the illegitimate use of violence; and 3) for a political faction or party to remain in power, it must enjoy the support of economic and social interests, broadly defined. Open access in the economic system prevents the political system from manipulating economic interests and ensures that if a political group abuses its control of the military it loses office. These three elements of a state monopoly on violence must develop within an institutional framework that makes commitments to limit the use of violence and maintain open political and economic entry credible. Control of violence in the larger society occurs through deterrence – the threat of punishment by the state – as well as by depriving nonstate organizations that use violence access to enforcement of organizational supports.

Control of the political system is open to entry by any group and contested through prescribed, and typically formal, constitutional means. All citizens have the right to form organizations, and they use the services of the state to structure the internal and external relationships of their organizations to individuals and other organizations. The ability to form organizations at will without the consent of the state ensures nonviolent competition in the polity, economy, and indeed in every area of society with open access.27 The ability of political actors to use organized military or police power to coerce individuals is constrained by the ability of economic and other actors to compete for political control. When embedded in a constitutional setting with institutions that provide credible incentives that protect various rights, open access and democratic competition prevent illegitimate uses of violence.

27As we discuss in detail throughout the book, in an open access society the state supports organizations by enforcing both the internal and external arrangements of approved organizational forms, such as corporations. In this sense, approval of the state is required for all legitimate organizations. Open entry occurs when state approval is given to any group that meets some minimum requirements. In Britain, for example, open entry into the corporate organizational form occurred in 1844 through a process of “registration” under which a group that wanted to form a corporation filed the appropriate forms at an administrative office of the government. Open entry requires the explicit recognition of the organization by the state, and the state extends recognition to all who want to form an organization. We discuss these details in Chapter 5.

An open access order exists only if a large number of individuals have the right to form organizations that can engage in a wide variety of economic, political, and social activities. Moreover, the right to form an organization has to be defined impersonally. Impersonality means treating everyone the same. Equality is impossible without impersonality.

An important argument in our conceptual framework is that impersonality grows out of the structure of organizations and the ability of society to support impersonal organizational forms (i.e., organizations with their own identity independent of the individual identity of the organization’s members). In the legal terms that came to characterize impersonal organizations in the Western tradition, these are perpetually lived organizations: organizations whose existence is independent of the lives of their members.28 Perpetually lived organizations must have an impersonal identity. The Romans had organizations that were legal persons capable of bearing rights and duties. Only over the last five centuries did the identity of the organization truly become independent of the identity of its members.

Competition in an open access order, therefore, differs from competition in natural states for another critical reason beyond limitations on competition through violence. Open access societies are capable of sustaining impersonal relationships on a large scale through their ability to support impersonal, perpetually lived organizations, both inside the state and in the wider society. Impersonality fundamentally changes the nature of competition. Impersonal markets and impersonal exchange are not just a theoretical ideal in economics; they are a feature of open access societies.

Individuals and organizations pursue rents as vigorously in an open access society as they do in a natural state, but impersonal economic and political competition result in the rapid erosion of rents. Joseph Schumpeter (1942) described this process of innovation and change in the economy as “creative destruction.” Innovation itself is a source of rents. An important form of economic competition occurs through the development of new products and services rather than lower prices or higher quality. Organizations form to exploit new opportunities and pursue the rents associated with innovation. Open entry and access to sophisticated economic organizations are prerequisites for creative destruction and a dynamic economy.

28A perpetually lived organization is not an infinitely lived organization; it is an organization whose “life” is independent of the lives of its members, so a modern corporation is a perpetually lived organization. Because a modern partnership must be reorganized on the death of a partner, it is not perpetually lived.

Schumpeter’s approach has an important implication for political behavior. If the constellation of economic interests regularly changes because of innovation and entry, politicians face a fundamentally different world than those in a natural state: open access orders cannot manipulate interests in the same way as natural states do. Too much behavior and formation of interests take place beyond the state’s control. Politicians in both natural states and open access orders want to create rents. Rent-creation at once rewards their supporters and binds their constituents to support them. Because, however, open access orders enable any citizen to form an organization for a wide variety of purposes, rents created by either the political process or economic innovation attract competitors in the form of new organizations. In Schumpeterian terms, political entrepreneurs put together new organizations to compete for the rents and, in so doing, reduce existing rents and struggle to create new ones. As a result, creative destruction reigns in open access politics just as it does in open access economies. Much of the creation of new interests is beyond the control of the state. The creation of new interests and the generation of new sources of rents occur continuously in open access orders.29

Many scholars emphasize the dangers of rent-seeking politics in open access societies (e.g., Bhagwati, 1982; Buchanan, Tollison, and Tullock, 1980; Krueger, 1990; Olson, 1965, 1982). These studies fail to appreciate that, although all governments attempt to create rents, not all governments do so to the same extent because not all operate within the same social order. Although open access does not eliminate rent-creation, it significantly constrains the kind of rent-creation that creates negative effects for society. Rent-creation that benefits only a narrow interest is not impossible; it is simply much less likely to occur in an open access society than in a natural state. Conversely, rent-creation that benefits large and encompassing groups – that is, rent-creation that is productivity enhancing rather than limiting – is much more likely to occur in an open access society than in a natural state.

Again, the basic insight reveals the existence of a double balance: open access and entry to organizations in the economy support open access in politics, and open access and entry in politics support open access in the economy. Open access in the economy generates a large and varied

29The process of rent-creation and rent-destruction is more complicated than the simple examples used here suggest; see Khan (2004, 2005) and Khan and Jomo (2000) for a sophisticated discussion of rent-creation. Baumol (2002) emphasizes the link between thriving markets and innovation.