Adam Smith on Escaping the Violence Trap

1. Adam Smith on Escaping the Violence Trap The Earl and Edna Stice Lecture In the Social Sciences University of Washington Barry R. Weingast Stanford University February 7, 2014 The Earl and Edna Stice Lecture February 7, 2014

2. Introduction • In 1776, Adam Smith asked in his famous work, The Wealth of Nations, what accounts for the differing levels of the “opulence” in nations? • Why do so many countries remain poor? • With the seeming intransigence of high levels of poverty throughout the world: • This question is as relevant today as in Smith's time • So too is Smith's approach to this question. The Earl and Edna Stice Lecture February 7, 2014

3. Introduction The essence of the “Violence Trap”: Josiah Ober summarizing Thucydides, The Peloponnesian War: • To survive, a community needs a wall for protection. • Walls require money. • But how to get money? • Trade or plunder. • To do so, you need ships. • But without walls, you don’t have the security to build ships. The Earl and Edna Stice Lecture February 7, 2014

4. Introduction • Why is poverty and under-development so persistent? • Many theories: • Bad Policies • Capital • Education • Good governance • Incumbent risk The Earl and Edna Stice Lecture February 7, 2014

5. Introduction • We argue: • The real problem is the violence trap. • We build on 2 ideas • (1) Violence is endemic • Median number of years between violent regime change is 8 years. • NWW’s thesis that all countries must solve the problem of violence. • (2) Episodic shocks The Earl and Edna Stice Lecture February 7, 2014

6. Introduction • Theory: • Distributed violence • The Natural State: The natural solution to violence. • Rent-creation. • Proportionality principle • Implies: • Limited access, • Lack of impersonality, • Lack of perpetuity • Violence trap • Absence of property rights, rule of law • Threat of violence • Adds risk to investment The Earl and Edna Stice Lecture February 7, 2014

7. Introduction • Proceed as follows • Data on endemic violence • Elements of the developing country environment • Theory: • Statics: How natural states mitigate violence • Dynamics: Shocks • Violence trap • Conclusions The Earl and Edna Stice Lecture February 7, 2014

8. Endemic Violence Study Regime Duration: Leadership succession without violence. The Earl and Edna Stice Lecture February 7, 2014

9. Endemic Violence • Poor Countries: • Median poor country faces: • Violent regime succession every 7 years. • Only 5% of developing countries” • Experience 50 years of peaceful succession. • Whereas 50% of the developed countries • Experience 60 years without violence. • Most developing countries regularly face violence. • Richest developing countries more like poor ones than the developed countries. The Earl and Edna Stice Lecture February 7, 2014

10. Developing Country Environment • Focus on two features of the developing country environment • (1) Distributed violence potential • Mexico • Military in many societies • Argentina, Brazil, Chile • Thailand • South Korea, 1950s-80s. The Earl and Edna Stice Lecture February 7, 2014

11. Developing Country Environment • (2) Shocks • Swings in commodity prices • Differential growth • Technological or demographic change • Discovery of minerals • Examples • Marcos’s Philippines • Putin in Russia • Mid-20th century Lebanon • Main point: • Shocks change the distribution of violence potential / balance of power. The Earl and Edna Stice Lecture February 7, 2014

12. How Developing Countries Mitigate Violence • Tactics to reduce violence • NWW (2009), Violence and Social Orders • Rent-creation. • Local monopoly on beer, cement, a mill; telephones. • Protection from competition • Substantial subsidies and privileges to one firm • Air India • Key Insight: • Make individuals and groups with violence potential better off cooperating than fighting. The Earl and Edna Stice Lecture February 7, 2014

13. How Developing Countries Mitigate Violence • Main implication: • The proportionality principle: rents and privileges must be in rough proportion to military power: • Each player’s rents must exceed their expected value of fighting. • Failing to do so means the group with more power than rents prefers to fight for more. The Earl and Edna Stice Lecture February 7, 2014

14. How Developing Countries Mitigate Violence • Implications • (1) Bargaining failure results in violence • (2) States must limit access • Protect rents and privileges • Suppress organizations – political, economic, and social • Many natural states: all significant organizations have direct ties to the ruler: • Mubarak’s Egypt • Suharto’s Indonesia, • Hussein’s Iraq • Nazi Germany The Earl and Edna Stice Lecture February 7, 2014

15. How Developing Countries Mitigate Violence • Personal exchange • Natural states lack: • Impersonal property rights, • Rule of law. • Many public goods • Direct methods of solving violence fail • Unilateral disarmament • Economic integration • Four natural state features: • Rent-creation: the proportionality principle • Limited access • Personal rather than impersonal exchange • Shocks: new violence. The Earl and Edna Stice Lecture February 7, 2014

16. How Developing Countries Mitigate Violence • An important lesson: • Economists see “market intervention” and “directly unproductive profit-seeking” • This perspective obscures the logic of the natural state. • The problem is not rent-seeking but violence. • In the face of distributed violence potential, rents are productive. • Nonetheless, solving the problem of violence through rents and limited access keeps most natural states poor. The Earl and Edna Stice Lecture February 7, 2014

17. Source: NWW, table 1.2 Bargaining and Shocks • Common developing country pattern • Years of peace punctuated by violence. The Earl and Edna Stice Lecture February 7, 2014

18. Bargaining and Shocks • Query: If a bargain satisfies proportionality principle, why violence? • Dynamics: episodic shocks, shift bargaining power • Regime survival requires adaptation • “Asymmetric information” • “I think I’m stronger than you think I am” • Failure to adapt to changing circumstances • Limited access: • Fewer ideas generated; • Lack of competition => harder to get rid of bad ideas. • Arab spring The Earl and Edna Stice Lecture February 7, 2014

19. Bargaining and Shocks • Main implications: • Big shocks require renegotiation to satisfy the proportionality principle. • Asymmetric information & commitment problems plague renegotiation. • Natural states therefore frequently fail to adapt to changing circumstances. • Experience violence instead. The Earl and Edna Stice Lecture February 7, 2014

20. The Violence Trap I • Consider a new leader’s choices (following violence). • (1) Maintain natural state • (2) Reform: • Remove policies creating rents • Relax limits on access • Foster impersonal commitments • Property rights • Rule of law • Economic integration • Disarmament • Problem with reform: • Relaxing these constraints • Threatens to violate the proportionality principle • Thus makes violence more likely. The Earl and Edna Stice Lecture February 7, 2014

21. The Violence Trap I • Violence trap implies that the natural state is stable. • Distributed violence potential • Lacks impersonality (property rights, rule of law) • Lacks economic integration • At best, most natural state develop slowly. • Many don’t develop at all. The Earl and Edna Stice Lecture February 7, 2014

22. Adam Smith on the Violence trap • Smith’s central concern in the WN is economic development. • Yet Smith is confusing: • He offers 3 different sets of insights into development: • Division of labor (Bks I&II) • Bad policies – e.g., Mercantilism (Bks IV&V) • The violence trap (Bk III) • Smith in WN book III • Thesis about the transition from feudalism to commercial economy • Explains the no-growth feudal equilibrium qua violence trap • How towns escape the violence trap • Easy to miss (most economists ignore BK III) The Earl and Edna Stice Lecture February 7, 2014

23. Feudalism as a Violence Trap • Feudal equilibrium • The King: • The chief great lord. • But not much more powerful than the barons. • Cannot provide security or protect rights. • Local lords captured most of the local surplus • Omnipresent violence required lords to convert surplus into security • Via local military organization • Most people lived at subsistence. • “Neither the kings nor the great lords could prevent violence. In those disorderly times, every great landlord was a sort of petty prince. His tenants were his subjects. He was their judge.... He made war according to his own discretion, frequently against his neighbors, and sometimes against his sovereign.” [WN] The Earl and Edna Stice Lecture February 7, 2014

24. Feudalism as a Violence Trap • Little investment: • “men in this defenceless state naturally content themselves with their necessary subsistence; because to acquire more might only tempt the injustice of their oppressors.” [WN] • This world was poor, violent, and undeveloped. • European-wide expansion of trade. • Potential gains to coastal towns from • Trade, • Investment • Specialization and exchange. The Earl and Edna Stice Lecture February 7, 2014

25. Transition from Feudalism toThe Commercial Economy • But endemic predation: • "The wealth which they did manage to accumulate under such unfavorable conditions was subject to the arbitrary exactions of both the king and those lords on whose territories they might happen to be based on through which they might pass." [WN] • Thus, the violence trap (Thucydides) • CNW terms • Bargaining failure due to • Many shocks • Problems of asymmetric information and commitment The Earl and Edna Stice Lecture February 7, 2014

26. Transition from Feudalism toThe Commercial Economy • Smith: the next step is political exchange • King and Town ally against the great lords. • New possibilities arose for the defense of towns against the lords. • In exchange for fixed taxes, the king granted the towns: • Political freedom • Self-governance and the right to make laws, collect taxes, • Build walls. The Earl and Edna Stice Lecture February 7, 2014

27. Transition from Feudalism toThe Commercial Economy • Political exchange created three simultaneous revolutions: • Liberty • Commerce • Security. • “Order and good government, and along with them the liberty and security of individuals, were, in this manner, established in cities at a time when the occupiers of land in the country were exposed to every sort of violence.” [WN] The Earl and Edna Stice Lecture February 7, 2014

28. Transition from Feudalism toThe Commercial Economy • Towns extended their reach into the countryside • “Commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors.” [WN] • Military advantage over local lords. • Bring property rights, security and investment into the countryside. • Countryside transformed from poor self-sufficient agriculture into specialists participating in markets. The Earl and Edna Stice Lecture February 7, 2014

29. Transition from Feudalism toThe Commercial Economy • Greater specialization and exchange/ division of labor implies economic growth. • Security transforms local lords and their retainers • Towns also grow due to long-distance trade. • Greater surplus allows towns to extend reach even further. • Positive feedback loop. • Towns grow. Extend their reach further. Greater division of labor, more growth. Repeat. The Earl and Edna Stice Lecture February 7, 2014

30. Transition from Feudalism toThe Commercial Economy • Smith makes clear the non-incremental nature of the political exchange between king and town: • “By granting them magistrates of their own, the privilege of making bye-laws for their own government, that of building walls for their own defence, and that of reducing all their inhabitants under a sort of military discipline, he gave them all the means of security and independency of the barons...” • “Without the establishment of some regular government…, without some authority to compel their inhabitants to act according to some certain plan or system, no voluntary league of mutual defence could either have afforded them any permanent security, or have enabled them to give the king any considerable support.” [WN] The Earl and Edna Stice Lecture February 7, 2014

31. Transition from Feudalism toThe Commercial Economy • In CNW terms • Feudal equilibrium = natural state • Distributed violence • Violence trap • Shock: possibilities for trade • Non-incremental response: • King and towns create a whole new corporate entity with very different properties from the rest of the country. • Towns escape the violence trap via increasing returns. • Walls, security allow greater investment, specialization and exchange. • Allows trade and provides growth • Towns further extend their reach, generating more growth. The Earl and Edna Stice Lecture February 7, 2014

32. Conclusions • International donor agencies • World Bank • IMF • European Bank for Economic Development • All have standard economic incremental reform model. • They ignore: • The problem of violence • The logic of natural states. • Their approach to reform has failed for 30 years. The Earl and Edna Stice Lecture February 7, 2014

33. Conclusions • The problems of development are much harder to solve than economists realize • Natural states are stable • Adam Smith points a different way. The Earl and Edna Stice Lecture February 7, 2014

34. Conclusions • Problem of donors: • Market reform • Democracy • Too little attention to issue of liberty, commerce, security The Earl and Edna Stice Lecture February 7, 2014

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