Institutional analysis in Economics has long been waiting for a study that is more substantive than formal and more prognosis-driven than diagnosis-driven. Two landmarks of the more formal and diagnosis-driven study are Douglass North's Institutions, Institutional Change and Economic Performance (1990) and Avner Greif's Institutions and the Path to the Modern Economy (2006). Now we have a new landmark of the more substantive and prognosis-driven study--Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (2009) by Douglass North, John Wallis, and Barry Weingast (NWW).
In North's Understanding the Process of Economic Change (2005), we learned that "there is no set formula for achieving economic development. No economic model can capture the intricacies of economic growth in a particular society. While the sources of productivity growth are well known, the process of economic growth is going to vary with every society, reflecting the diverse cultural heritages and the equally diverse geographic, physical, and economic settings" (North 2005: 165). In Violence and Social Orders, the "set formula for achieving economic development" appears to be eventually found.
The message from this book is: Natural state (fragile, basic, and mature) and open access society are two basic forms of social orders in which violence control is the central problem; the degree of open access to political-economic organizations (impersonality and perpetuality) defines various social orders and their level of social development. In other words, the key message of the Social Orders Framework can be summarized by the "open-access logic": Open access in political-economic competitions drives social development; societies are different simply because they are different in how they provide political-economic access to different social groups.
This review is not intended to add one more to the long list of praising how good this book is. There is no question about the landmark status of this book (exemplified by chapter 5 and 6). My intention is to show its weaknesses so that readers will know there is another way of evaluating the book through a different window.
1. "Political and economic development appear to have gone hand in hand" and "high income and good political institutions are closely related" (p. 2-3). This conclusion is obviously falsified by the 7 countries/regions (including oil-rich countries) cited yet ignored by the book. The relation between high income and good political institutions are simply not strong enough. The hasty conclusion reflects the fact that the authors are too eager to establish a causal relation between economic development and open access in political competition while in fact rule of law and open access in economic competition are more fundamental (note that not all oil-rich countries are similarly rich). Even if there is only one anomaly, "good political institutions" will be out of the picture as the "common denominator" for economic development. In fact, open political competition can explain neither the experience of rich countries, nor the experience of emerging markets.
2. "Impersonally defined access (rights) to form organizations is a central part of open access societies." (p. 7) Yet impersonal characteristics may be highly cultural. The discussion of impersonal characteristics in a non-cultural context demonstrates a regretful shift of attention from "formal-informal rules-organizations" to "formal rules-organizations" in explaining institutional changes, which deviates the balanced treatment in the North 1990 framework. In fact, informal rules play a key role in explaining why various social orders progress or regress in different directions. The choice of social order is not only political, but also cultural. It remains a challenge for institutionalists to carry the balanced logic of their formal framework into their substantive framework.
3. "All societies face the problem of violence" (p. 13) doesn't necessarily mean that controlling violence is the basic problem of all societies. In fact, predation is a broader and more proper notion, and controlling predation (both violent and non-violent predation) is the key for all societies because work and predation are two basic forms of human effort and non-violent predation becomes increasingly relevant as societies have turned more complex and violence has been brought under control. Hence, the focus on "commit to stop fighting" (p. 18) diverts our attention to the distributional predation in open access orders and leads to the negligence of the negative impacts of open political competition on economic growth and civic virtue.
4. The "endogenous pluralist approach" (p. 128) cannot refute the logic of collective actions and rent-seeking because it fails to see that the problem is not about "Schumpeterian incentives" (p. 141) or group "common interests" but about the cost, timeliness, procedural stickiness, and institutional rigidity of distributional adjustment. "The competitive process of rent-erosion" (p. 142) in politics is neither frictionless nor instant in the neoclassical way, especially when the ideology factor in the competition culture is taken into account. NWW's "idea of an equilibrium set" (p. 141) appears to be a new version of the neoclassical "complete competition" in politics. Here, institutional analysis is unfortunately downgraded into a non-institutional idealistic interpretation. What has been turned "on their heads" (p. 140) is not the logic of collective actions and rent-seeking, but the rigorous and realistic logic of the balanced ideas in North 1990 (North et al 2009 against North 1990). Open political competition becomes the universal remedy of all social order problems. Such a "total solution idea" (instead of a "part of the problem idea") eventually fails to see how political competition is fundamentally different from economic competition (the authors seems to give up an explicit "theory of double balance" for an integration of politics and economics appeared in an earlier draft). By the way, the ongoing worldwide financial crisis is exactly derived from this type of Darwinian "competition worship" ("animal spirits").
5. The most intriguing result from the unbalanced non-cultural treatment and non-institutional neoclassical inclination is clearly demonstrated in addressing the question of "why institutions work differently under open access than limited access"(p. 137). The authors take on an outcome-oriented rather than a process-oriented approach for open access and democracy, both of which are not only objectively measurable and conceptually identical to any observers, but also independently determined and irrelevant to any historical-cultural context. Using such outcome-oriented approach, they can easily draw conclusions that natural states' adoption of open access institutions in general and implantation of democratic elections in specific "are likely to work less well" and "may unleash disorder, making the society significantly worse off"(p. 265), all due to the lack of open access institutional environment. The problem of this approach is twofold: First, it falls into a contradiction between outcome and process when asserting that Britain, France, and the US (the first movers) made the transition to open access by mid 19th century (p. 27) and yet "the extension of citizenry" (p. 144) in the US were not completed until 1960s. Second, it fails to respect the historical fact that an open access institutional environment cannot be created before any incremental changes are allowed to happen. It is therefore problematic and unfair from an outcome perspective with the ideal end-result criteria to view all incremental policy advises for "pre-doorstep" natural states as ineffective. After all, if incremental changes did work among the first movers, how come it won't work for late comers? Is open access an imperfect process out of specific public choice or is it a perfect moral state that can be achieved once and for all? Should late comers do nothing (policy changes are not going to work anyway without an open access environment) before the doorstep conditions or an open access environment to happen first? Or is there anything seriously wrong with the outcome approach? The answer should be obvious. Hence, the separation of two development problems, one within the natural state and the other during transition to open access (p. 264), is not valid. The two real development problems are the "pre-open problem" of should political-economic access be open and how should it be open in natural states and the " post-open problem" of how to deal with the crisis and dilemma created by open access in open access societies.
6. But equally captivating is the assertion that transition to open access takes "typically about fifty years" and that "South Korea and Taiwan's experience seems to parallel that of Europe" (p. 27). Can impersonal and perpetual institutions be impersonally enforced perpetually under any cultural context? Here, the impact of culture on open access enforcement is completely abstracted away, leaving the problematic experience (especially in Taiwan) unexplained while thinking wishfully that the shared historical destiny of identical open access is inevitably happening. In the troubled case in Taiwan, the difference in the cost of losing in politics cannot be weighed only by political economy, but should also be weighed by cultural psychology (Chinese "cult of face"). "A deep understanding of change must go beyond broad generalizations to a specific understanding of the cultural heritage of that particular society" (p. 271) remains a lip service and not actually integrated into the framework. North appears to digress from his own "warning" in his previous work: "a word of warning--although explicit rules provide us with a basic source of empirical materials by which to test the performance of economies under varying conditions, the degree to which these rules have unique relationships to performance is limited. That is, a mixture of informal norms, rules, and enforcement characteristics together defines the choice set and results in outcome. Looking only at the formal rules themselves, therefore, gives us an inadequate and frequently misleading notion about the relationship between formal constraints and performance." "Although formal rules may change overnight as the result of political or judicial decisions, informal constraints embodied in customs, traditions, and codes of conduct are much more impervious to deliberate policies. These cultural constraints not only connect the past with the present and future, but provide us with a key to explaining the path of historical change." "The long-run implication of the cultural processing of information that underlies informal constraints is that it plays an important rule in the incremental way by which institutions evolve and hence is a source of path dependence." (North 1990: 53, 6, 44) There seems to have a questionable shift from emphasizing institutions as constraints on behavior and performance to emphasizing institutions and their performance as outcomes of open access to organizations in which informal rules are no longer critical. The truth is: Institutional arrangements work differently not only because of the difference in institutional structure (open access or not), but also because of the disparity of informal institutional rules.
In summary, there are six reasons why the two-social-order framework is inadequate in explaining the variations of social orders.
1. Open access is great because it makes societies rich. But if there is no causal relation between open access (especially open access in politics) and economic development, then there is a big problem in using the degree of open access to differentiate social orders. But a bigger problem comes from the fact that the authors anti-logically move on with it anyway despite "evidence from the past few decades is mixed" (p. 2) and "a causal link...has remain an open question" (p. 3). The fact that high income and open access helps sustain democracy suggests that there are other reasons for economic development and democracy and that using open access in politics as the key feature to differentiate social orders begs insurmountable logical hurdles.
2. The authors realize that their "Euro-American focus leads to narrow inferences from historically unique conditions that are inappropriate for other societies" (p. 193). Yet they fail to realize that their "narrow inferences" is not about specific applications that duplicate historical paths, but about arriving at a general social order framework from a parochial focus. The issue here is not about its "compensating virtues" that "A framework for understanding the transition must be consistent with the experience of the first movers", but about a general social order framework may not be derived from the experience of the first movers.
3. The next problem concerns the single focus on violence as the central problem of social order. "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.... 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.... open access societies are better at constructing effective responses to novel problems...and enjoy a greater degree of adaptive efficiency." (p. 252) It is a wider vision in seeing destructive efforts (besides productive efforts) also contribute to the level of development and the rise and fall of civilizations. Yet the focus on violence instead of predation leaves out one other key aspect of human efforts: distributional efforts (For more detail, see Frank S. Fang. 2007: China Fever, chapter 4).
4. What's problematic next is its critique on the logic of collective actions and rent seeking. The reason why the distributional problem simply cannot be properly addressed by the open access framework is also because it inherently relies on the merit rather than the problem of open access to differentiate social orders.
5. The fifth reason is about the consolidated control of military. The Weberian theory sees state monopoly on violence by a single actor instead of a dispersed groups of actors; "For a natural state to create consolidated control of the military, it must simultaneously develop powerful forms of economic and political organizations. In the absence of such organizations, the military organization and those who lead it have the power to subvert the privileges of the other members of the dominant coalition." (p. 258). This is true. But it doesn't mean that open access to political organizations has to happen so that "other nonmilitary elements in the dominant coalition are confident that they can credibly discipline the military organization if it attempts to abuse its military power" (p. 257-258), as has been clearly demonstrated by the case of "party state" in China. Here, on the surface, the problem is about not seeing China's party state as a good case of applying the idea of impersonal and perpetual organization. Below the surface, the problem is about the rigid notion of open access in politics that fails to account for a unique cultural-historical situation.
6. The last reason involves the difference between economic and political competitions. To make open access in political competition perfectly relevant, it is necessary to not only see it as the critical force that sustains democracy (which is correct), but also see it as perfectly free from any negative effects (which is wrong). Here, the nature of politics and the nature of mankind are both seen as ideally perfected by the open access mechanism. The fundamental difference between economic competition and political competition are therefore brushed away. And that's why the logic of collective actions and rent seeking has been mistakenly turned on their heads. The reason of this blind spot is partly due to the fact that economists usually see the difference between economic and political competition from the perspective of a buyer-seller relation. Market competition is seen as continuous and political competition is intermittent; market competition usually allows several competitors and political competition has an all-or-none feature; and market competition better defines buyer's benefit while political competition has more uncertainty in binding promises and pledges. But even by only looking at the difference of action continuity, chance of survival, and uncertainty of commitment, one should realize that managing non-violent predation (in both economic and political competition) is as critical as managing violent predation. It is theoretically incomplete to say "the structure of all social institutions is deeply conditioned by the methods used to address the problem of violence" (p. 258), even though they realize that "a theory of politics should explain the distribution and use of power, violence, and coercion within a society" (p. 268).
Behind all these reasons, there is only one critical fact: "We do not provide a coherent and well-integrated theory of the state." (p. 270) Yet it is without a new theory of the state that causes the framework run into all sorts of conceptual problems. When the double balance of politics and economics is depicted as a social tendency, history shows that the double imbalance or the relative independence of politics and economics is not necessarily an illusion. Democracy can be better defined as open access in political-economic competition rather than contested elections; yet an outcome approach is neither historical nor logical.
So is there an alternative? The answer is yes. But it requires to look beyond the perspective of a buyer-seller relation for the difference between economic and political competition, and to look strictly on the positive nature of social orders leaving a moral concern as secondary. A "three social order" framework can then come out of a theory of the state that views the state from a property rights perspective, which by the way is totally different from Yoram Barzel's 2001 idealistic state model (More detail in a project titled "Institutional Reasoning" at projects.ieCenter.org).
Institutional analysis in economic development appears to continue to remain in its more formal and diagnosis-driven stage. NWW's new attempt for a substantive and prognosis-driven framework is a milestone that seems to be unable to point to a more meaningful direction. Yet, we cannot progress without the type of high level thinking exemplified in this book. We should all be grateful to the authors' contribution.