North, Wallis, Weingast: Interpreting Human History Primitive State | “Natural State” Limited Access Society (e.g., Crony Capitalism) | Open Access Society Smith’s vision Marx’s “Capitalism” North, Wallis, Weingast’s “Developed society” Understanding the transition

“Double Balance” Limited Access Society Open Access Society Political Opportunities Limited Competitive politics + + Economic Opportunities Limited Competitive economy Transition to Open Access Move to openness in both political and economic spheres Incremental policies not effective But why should elites of limited access society share power with the masses? Missing Middle

From violent primitive state to stable “natural” state Warlords capture rents from resources they control when they stop fighting each other | Establish a State An “adherent” organization of self-interested elites | Specialization  Productivity  Rents Establish franchised organizations Craft Landlords Traders Educators Clergy Guilds Limits to entry | Rents Stakes in status quo by the various elites

Limited Access Society Rents | Stakes in status quo | Limits to specialization | Productivity/stability tradeoff | Inefficiency in interest of stability

Limited Access Inefficiencies Political allocation of resources – Suspension/distortion of price system Non-elites not protected/excluded/exploited – Innovation stifled – No incentive to invest – Incentive to shirk Limited Access and Stability Political Power  Economic Power The “Double Balance”

Developed, Open Access Society: Capitalism Impersonal entry requirements  Large number and variety of organizations (civil society) State has monopoly of violence Legitimate use of violence well understood and contained Enforced by credible sanctions against government Variety of organizations a credible threat to government Competing jurisdictions and mobile factors Tax revenue and wealth of the nation Market system in operation Price allocation – impersonal exchange – efficiency Possibility of Schumpeterian innovation – creative destruction Open Access and Stability: The “Double Balance” Political Competition  Economic Competition

Transition: Limited Access to Open Access “Doorstep” condition: impersonal exchange among elite Mutually reinforcing requisites: Rule of law for elites Perpetual organizations that can honor debts (the State, corporations) Political control of the military (dispersed military power inhibits contracts) Impersonal exchange expands specialization  Wealth of elite Expansion of dominant coalition…with benefit to elite – State revenues benefit from free market operation – International competition – war Need for mass participation  concessions to non-elite Limited access institutions adapted to open access – Small changes consistent with interests of elite Evolution of the corporation – from limited to readily available charters PROGRESS ON BOTH POLITICAL AND ECONOMIC FRONTS