The natural state: The political-economy of non-development

Economic historians Douglass C. North, John Joseph Wallis, and Barry R. Weingast published a paper in 2005 (later included in their book Violence and Social Orders, 2009) titled “The Natural State: The Political-Economy of Non-Development”.

You can read the paper here (PDF). Please do so with the DPRK in mind.

Though written at a theoretical level (not-specific to the DPRK) the authors do what I consider a remarkable job at creating a model that coherently explains some of the inconsistencies and peculiar behaviors of the DPRK government–particularly with respect to economic policy.

Implications of the model: Natural states use economic policy (privileged access to valuable resources or rights) as a mechanism to promote the stability of the ruling coalition. However, since natural orders rely on personal exchange, contracts and agreements cannot be credibly enforced over a horizon longer than the ruler’s life. As a result natural states can achieve some low levels of economic growth but are not able to easily achieve “development” (and there is a difference).

I have pasted some relevant sections of the paper below:

Natural state’s create property rights to the exclusive use of land, labor, and other valuable resources, as well as rights to perform valuable economic functions, such as trade. These rights are only available to members of the dominant coalition. Limiting access to rights increases economic rents associated with the rights. The rents bind particular constituent groups to the ruler because they have something to lose if the ruler is replaced. Creating a wide range of rents allows the ruler to create a support constituency potentially capable of both maintaining power and supporting the wealth associated with specialization and exchange.

The natural state therefore establishes and enforces a property rights system, whereby specific groups with specific ties to the ruler have specific rights and privileges (e.g., a group is granted the exclusive right to trade in cloth). The ruler protects the rights and privileges against encroachment by others. The ruler has incentives to honor these rights, because constituent groups whose rights are infringed can punish the ruler by withdrawing their support, thereby lowering the probability he survives.

The natural state is natural because it is based on personal exchange: privileges are granted to specific groups and differ across groups. These exchanges are enforced by the same type of mechanisms used in the primitive order, namely, face to face repeat play mechanisms. Moreover, economic exchange is also based on personal exchange mechanisms: the natural state cannot sustain impersonal exchange associated with open access orders.

Our approach implies that the natural state is self-limiting in several senses. First, a natural state’s support group cannot grow too large. Increasing the size of the coalition not only dissipates the rents, it lowers the costs that every member of the coalition can impose on the ruler. Lowering this cost, in turn, threatens the entire system because it threatens the principal means that constituents use to police their rights. The set of constituents must therefore be a small portion of the society.

Second, the state is self-limiting in that it cannot honor rights to individuals outside of the narrow set of constituents. These people have no ability to punish those in power, and therefore the state has no incentive to honor any rights for them. Historically, most people living in natural state, e.g., peasants, lived at subsistence level.

Third, the natural state is self-limiting with respect to the economy. Natural states represented an important advance at the time of the first economic revolution, and remained important for centuries. But in the modern world, they have a wide range of negative economic consequences. First, the drive to create rents means that the natural state restricts markets. Indeed, the search for political stability leads the state to control as many markets as possible. The natural state’s systematic “market intervention” is not the result of mis-guided policymaking, but fundamental to how they create political order and stability. Natural states therefore cannot support competitive markets based on open entry. This logic also implies that natural state view markets as instruments of political control, not sources of citizen welfare. All citizens outside of those who are privileged constituents have no incentive to invest since they cannot capture the fruits of their investment.

Although the natural state represented a significance advance over primitive orders, enabling societies to capture the potential of the first economic revolution, they have become in modern times an impediment both to economic development and to human welfare generally. Their fundamental basis in personal exchange as the means of organizing both politics and economics means that natural state cannot be easily or incrementally adjusted in a way that produces impersonal exchange in either politics or economics. The complex set of interdependent relationships in the natural state are an impediment to reform.


2 Responses to “The natural state: The political-economy of non-development”

  1. Charles Park says:

    Shows where underdeveloped economies like North Korea needs to go – and where advanced developed economies like the US has to be careful not to loose…