I just need to press again what I wrote in the previous reading blog that everything starts to culminate in a coherent understanding of how markets function. However, the first two readings for this class present the phenomenon more from a macroeconomic and historical point of view, while the solid theoretical microeconomic/collective action foundations are underlying each piece.
Charles Tilly argues, with brilliance and sometimes considerable wit, based on the European history, that war making, state making and capital accumulation are mutually reinforcing processes. Additionally, he argues that the size of the government is the function of the effort devoted to extraction, state making, protection and war making. In general, his argument favours Underhill’s proposition that governance is endogenous to the markets, but Tilly’s theory adds another layer, the role of violence and wars in this process.
The second reading (North, Wallis and Weingast, 2009) goes on with elaborating on the role of violence in the making of social orders, and in a broader sense on the different developmental trajectories of countries. North et al differentiates three social orders, the foraging order, the natural state and the open access order. Their main proposition is that the open access order has several institutional characteristics, which favour growth and welfare. They argue that open access order societies have not just the most developed economic apparatus and highest degree of welfare, but also the most articulate and democratic political institutions, therefore political and economic development is closely interrelated. They argue that in order to attain this degree of development violence has to be curbed, which is done through institutions, which embody the rules of the game. The goal of these institutions is to support complicated and sophisticated contractual organizations, both inside and outside the state, therefore control violence. Development is the function of the number and sophistication of these organizations and institutions. But it’s important to note that this process is not teleological, the internal dynamics of elites, can yield multiple equilibria and create a constant instability. This point is vividly illustrated in the third chapter, that even Britain lingered back and forth between the different developmental stages. The book’ underlying argument intersects and builds on the insight of Buchanan, that individual act the same, but outcomes are determined by the institutional framework. The proposition that rent-seeking is a natural behaviour, present in all systems, but institutions can tame it and make it beneficial to the society. Implicitly arguing that the inherent logic of markets does not make a country more developed, institutions are needed to make it happen.
Brousseaue and Glachant also underpin what has been said before, that markets need institutions and they are closely interrelated, but from the microeconomic point of view. They argue that markets are manufactured, therefore imperfect, before they are made by humans (who are boundedly rational), therefore they need governance. But on the other hand governance is also imperfect due to the short-sightedness of collective action. Based on this they argue that market as a system is difficult to and is rarely the result of an optimization process.
In the last piece, the great A. O. Hirschman revisits exit and voice. The main argument related to our inquiry is on the end of the third essay. He argues that public goods increase loyalty in a society, and understood complexity is the ultimate factor preventing exit. So, he implicitly argues that a developed institutional framework and a historically developed social order in a society can serve to prevent one from “voting with his feet”. This also corresponds to the conclusions of the other three readings, institutions are key in the success of a society.
- Charles Tilly – War-making and State-making as Organized Crime, 1985
- North, Wallis and Weingast – Violence and Social Order, 2009
- Brousseau and Glachant – Introduction: Manufacturing Markets – what it means and why it matters, 2014
- Hirschmann – Around Exit, Voice and Loyalty, 1981