CRGP Affiliated Faculty Douglass North has recently released published with John Wallis and Barry Weingast called, "Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History". Once you get past the lengthy title, you will find within the book a wonderful analytic framework for understanding the critical institutional differences that separate the relatively small set of so-called "open-access societies" from the much larger set of so-called "natural states".

Examples of open-access socieities include countries like Canada, Norway, and U.S.A, while Thailand, Pakistan, and Saudi Arabia are good examples of natural states. North et al. argue that "perhaps 25 countries and 15 percent of the world's population live in open access societies, the other 175 countries and 85 percent live in natural states."

Open-access societies are a relatively recent phenomenon that emerged at the end of the 18th and beginning of the 19th centuries, and that from an economic perspective can be characterized as having a larger "private sector" supported by strong rule of law, impersonal exchange, and third-party enforcement of agreements. In contrast, the economy of most natural states is dominated by politics, personal relations, and insecure private property rights, with economic activity carried out largely under the umbrella of various forms of state owned enterprise.

The transition from the poorer natural-state (which has dominated world history) to the wealthier open-access society "entails a set of changes in the economy that ensure open entry and competition in many markets, free movement of goods and individuals over space and time, the ability to create organizations to pursue economic opportunities, protection of property rights, and prohibitions on the use of violence to obtain resources and goods or to coerce others. In the past century, political and economic development appear to have gone hand in hand."

One of the fascinating ideas contained with the manuscript is that there may be a set of "doorstep conditions" that exist that must be satisfied for states to cross over from the conditions of the natural state to the conditions of the open-access society. "The doorstep conditions represent institutional and organizational support for increased impersonal exchange... and "create an environment where impersonal relations within the elite are possible."

• Rule of law for elites (so that the elites cannot tear up contracts and re-write rules, even amongst themselves, so that they are bound by their commitments),
• Perpetual forms of organization for elites (including the state itself), and
• Consolidated political control of the military (so that the military cannot seize control at its leisure as it does from time to time in a place like Thailand),

One potential critique of the manuscript, is that it is a bit too reductionist. Any attempt to sort all human societies into three buckets requires that we ignore the richness of the complex constellations of institutions within and across societies that through institutional analysis we are only recently beginning to understand and appreciate. Nevertheless, such a framework is both powerful and elegant and boils much of the disparity and difference between developed societies and the natural state down to the bare essence.

The model will surely have important implications for development institutions. It implies that rather than sending aid and surplus wealth from the open-access societies, we should do more to understand the doorstep conditions and how to "engineer" the transition from the natural state to a system of impersonal exchange in order to put the conditions of positive development in place. The model also has important implications for investors -- if we can identify those developing countries where the doorstep conditions have recently been satisfied, there should be a higher liklihood that a period of sustained wealth creation will follow, and thus disproportionate returns to investment relative to other developing countries.

* Note -- All quotations within this blog posting refer back to an early version of the North, Wallis, and Weingast manuscript. The final version of the manuscript that you can purchase from Amazon.com may have been revised and therefore some of the quotations herein may be out of date.

Posted by rjorr at April 7, 2009 6:15 PM