Author Archives: Oren Litwin

Cities, Money, Power, and Political Bargains

20 Thursday Jul 2023

Posted by in Politics, Politics for Worldbuilders, State Formation, War

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For most of post-Roman, premodern history, Europe was hardly the most powerful region in the world. China and Japan were in many ways far more powerful than any European power and had more advanced technology. Africa too featured sprawling empires, such as that of Mali. Europe, by contrast, was something of a backwater, struggling with depressed trade, frequent war, limited education, and disease among other obstacles. And yet starting only a few hundred years ago, strong states emerged in Europe that were able to mobilize vast wealth and military strength sufficient to subdue most of the globe.

The question that scholars have grappled with is how this happened. The “state-formation” literature is generally more applicable to the discussion of state capacity (a topic to be covered in Book 3 of my series) rather than the economy per se; but it is still useful to us as we discuss worldbuilding models of the economy, because in one of the leading theories of state formation, economic development—and the growth of cities in particular—plays a central role.

In Charles Tilly’s Coercion, Capital, and European States, AD 990-1992, he argued that European cities played a key role in the development of strong states because of their role in concentrating and deploying capital. While many states (such as Russia) were heavily coercion-intensive, states that featured a large amount of capital (such as the Netherlands) eventually found that they could mobilize more of that capital by sharing political rights with the merchant class. As a result, high-capital states that made political bargains with their populace were eventually able to build more powerful militaries than predominantly coercive states, and that particular model of state structure became common.

(It is worth pointing out that Tilly explicitly limited the scope of his theory to Europe due to the unusual concentration of urban cities and high populations found there, and did not apply the theory to other regions. For a while, there was a thriving literature arguing that Tilly’s argument failed in various other regions, or that it did not account for various factors even in the European experience. When the dust died down, I think the best evaluation is that Tilly’s basic thesis holds true even outside of Europe where its necessary conditions hold, such as in China. And where it does not hold, scholars trying to explain why have enriched the general theory by discussing the differing conditions that resulted in other outcomes, such as Jeffrey Herbst’s work on African state-building.)

Fundamentally, the driving force behind the development of strong states was the need to prepare for war. The first states were formed by men seeking to extend their control over others, and the states with the most power would extend their control as far out as it could go, stopping only when they reached the limit of their ability to project power—whether because of the limitations of available transportation technology, geographical barriers, or the opposition of other states. As a result, in each region, the most powerful state set the terms of coexistence—neighboring weaker states could either submit to vassalage or outright conquest, or else spend disproportionate resources on their defense. As Tilly puts it, “[M]ost rulers settled for a combination of conquest, protection against powerful rivals, and coexistence with cooperative neighbors.”

Within the constraints imposed by powerful rivals, states had to build structures to efficiently extract resources from their populations (or other populations forced to pay tribute or subject to plundering) and then translate those resources into military power. Tilly zeroes in on four variables to explain the variable success of a European state in doing so:

  • its concentration of capital,
  • its concentration of coercive power,
  • its need, and ability, to prepare for war, and
  • its position within the regional or international state system.

For Tilly, the key difference was between capital-intensive and coercion-intensive regions. In short, coercion-intensive states were able to mobilize larger armies, at least initially; but their advantage was nullified when warfare changed to require more and more money, to pay for professionalized troops, new weapons, and regularized logistics, and coercion-intensive states tended to have stunted economies as a result. Meanwhile, capital-intensive city-states had skilled professional armies, but small ones; they had not enough population to compete effectively with national states in the long run. The sweet spot was occupied by national states built around large, capital-intensive cities so that their political institutions tended to grant rights to the holders of capital. As a result, they could access large national populations and the money needed to fuel powerful armies.

Coercion

Tilly describes three kinds of European states during the period under discussion:

  • Tribute-taking empires tended to have relatively low accumulations of coercive power, but high concentration—that is, they might have had one or two armies that periodically swept through their vassal territories, demanding resources at swordpoint and punishing rebellions. Such empires were relatively fragile; if an adversary managed to accumulate significant coercive power, the empire’s ability to extract tribute might collapse entirely.
  • Systems of fragmented sovereignty typically included city-states as well as urban federations such as the Hanseatic League or the early Netherlands, which featured several loci of political power without a single clear sovereign. Such systems tended to have high accumulations of coercive power (usually because each of the constituent cities or other units was rich enough to afford its own army). This is almost true by definition; if a fragmented system were not able to accumulate a lot of coercive power, it would have been swallowed up by a competitor. However, such systems usually featured low coercive concentration, as the cities often cooperated poorly on defense and rarely subordinated their forces to a unified command.
  • Finally, national states were in the middle: featuring a high concentration of strong coercive power, but forced to bargain with their populations for their cooperation—typically by granting them political rights or participation of one kind or another.

Capital

Whether capital is concentrated or not depends heavily on the available technologies, and whether they tend to encourage distributed or centralized production.

In a subsistence economy, there is practically no capital at all as we are used to thinking of it. Even if there are a small handful of nobles living in castles, and merchants living in sturdy houses, most people have absolutely nothing to their names. Fernand Braudel (The Structures of Everyday Life, p. 282), writing of the centuries before the eighteenth century in Europe, notes that official inventories of possessions of the deceased almost invariably were restricted to “only a few old clothes, a stool, a table, a bench, the planks of a bed, sacks filled with straw.” That was all that most people had. Capital as we know it was the province of a very few people who engaged in large-scale trade or taxation. Labor-saving devices were few, even including such things as plows (many farmers were forced to use spades and dig by hand). The most readily available form of capital was living beings: livestock, slaves, professional hirelings, or peasants drafted for periodic corvée labor. (That is, the analytical distinction between capital and labor essentially breaks down.) As a result, to accumulate useful capital you had to command the labor of people, which is why rulers were often forced to rely on local landlords to muster their peasants.

In the “protoindustrialization” era of cottage industries, the available technology made production suddenly more efficient, but did not produce large economies of scale—at a time when the roads were just good enough for finished goods to be cost-effectively sent to markets, but not good enough for raw material and workers to routinely travel to centralized production. Capital flowed to labor, in smaller-scale workshops dispersed through cities and their surroundings or out in the countryside. This was the time of the putting-out system, of small workshops and manufacturies built around windmills and watermills, of largely local production. As a result, there was prodigious accumulation of capital compared to what had come before, but it was not excessively concentrated and was spread around relatively evenly. Still, cities served as nexuses for trade, and represented the most available “containers” for capital. City-based merchants and burghers became politically important, because they had the money that rulers needed to pay for their armies. (And sometimes, as in the case of the Hanseatic League, the burghers became rulers themselves.)

By contrast, industrialization featured massive centralized factories, encouraged by the coal boiler and the huge returns to scale that it created. Workers came to capital, concentrating themselves in the cities. The rewards of production became concentrated in relatively few hands and places, which consequently made it easier for governments to make bargains with such capitalists and appropriate some of that wealth in exchange for political privileges.

Effects on State Power

Tilly notes, “Two factors shape the process by which states acquire resources, and strongly affect the organization that results from the process: the character of the bottom-up hierarchy of capital [that emerges naturally from trade and exchange], and the place within that hierarchy of any location from which a state’s agents try to extract resources.” In other words, for a state to be capable of taxing individual incomes requires far more institutional capacity than a state that can only tax salt entering at a single port, for example. And conversely, a state that is dependent on a few sources of tax income must be more solicitous to the interests of the relatively few, relatively wealthy taxpayers.

As a result, states that emerged gradually during the early modern era developed in a clear pattern. The biggest cities with a lot of commercial activity and wealth often became their own city-states (such as in Italy and pre-Bismarck Germany). The regimes in these city-states were often thinly structured, able to easily collect customs duties and borrow money from bankers without large coercive bureaucracies. That, in turn, tended to discourage coercive government policies on the margin. Somewhat less powerful cities were typically incorporated into national states, but were able to negotiate political bargains with the developing state in exchange for their tax revenue (as in France).

By contrast, regions that were relatively poorer and had relatively few cities with weak commercial links with the hinterlands around them often were subject to straight coercion by the ruler, in states that covered a larger geographic area but a relatively dispersed and poor populace (such as Russia). Tilly writes, “In broadly similar ways, Russian, Polish, Hungarian, Serbian, and Brandenburger states formed on the basis of strong alliances between warmaking princes and armed landlords, large concessions of governmental power to nobles and gentry, joint exploitation of the peasantry, and restricted scope for merchant capital. Repeatedly, leaders of conquering forces who lacked capital offered their followers booty and land, only to face the problem of containing the great warrior-landlords they thereby created.” The only feasible solution was to rely on extensive force, which became less and less effective as the coercive states fell behind their neighbors on economy.

******

This has gotten quite long and somewhat disorganized, but the key ideas are still useful in your worldbuilding. States need to survive in a dangerous world, and need money and power to do so. In poor settings, highly coercive states have an advantage; but as capital accumulates, richer societies that made political bargains with their populaces end up pulling ahead. (On average!)

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post will show up in the planned second and third books in this series, working titles Wealth for Worldbuilders and Tyranny for Worldbuilders respectively. No idea when they will be finished, but they should be fun!)

Internal Discipline in Rebel Movements, Part I

13 Thursday Jul 2023

Posted by in Politics, Politics for Worldbuilders, Revolution, War

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We fiction writers often feature resistance movements in our stories. American culture in particular lionizes rebels and guerrillas, thanks in part to our rose-colored cultural memory of the American Revolution on the one hand, and some people’s idealized picture of socialist revolution in the Che Guevara mode on the other.

In real life, most resistance movements fail before they even get started. Of the ones that get established enough to fight a serious war against the state, most of them lose—and before they lose, many of them victimize civilian populations more brutally than the states they try to overthrow.

Yet some resistance movements are protective of civilians, and maintain internal discipline to ensure that their foot soldiers do not steal or murder with impunity. Some of them end up getting corrupted by success and start predating civilians; but a few manage to stay moral all the way to victory.

What makes the difference? Why do some rebel groups routinely harm civilians and others don’t? And more to the point, how can we writers use these concepts in our stories?

Jeremy Weinstein, in his book Inside Rebellion, provides an unexpected answer that becomes utterly compelling as he lays out his evidence. Weinstein argues, on the basis of considerable fieldwork in Peru, Uganda, and Mozambique as well as analysis of the literatures on several other civil wars, that the key difference is the level of resources available to the rebel group at its inception.

If a group initially has very few resources (primarily money, food, and weapons), then it must quickly build links to a broader civilian community in order to survive. The need to maintain relationships with the populace then impels the group to develop strong internal discipline and governance, and to behave well with civilians (except for selective killings done for strategic reasons, for example executing collaborators).

If, on the other hand, a group has access to significant resources—money from a state sponsor, or from the drug trade, or from natural resources, for example—then it has much less need to maintain good relations with the civilian populace. That, by itself, doesn’t force a group to harm civilians; but the easy availability of resources tends to lead a group to pay its members well, which attracts a different (and less savory) caliber of recruit than would agree to join a poor, weak resistance group without resources.

This is not a simple argument of “rich group kills civilians, poor group does not.” Weinstein carefully lays out the cascading effects of that difference in initial conditions as they bear on five distinct problems faced by rebel groups (and by governments too, although that is outside of Weinstein’s scope):

  • Recruitment;
  • Maintaining discipline;
  • Managing civilians in areas the group controls;
  • Punishing people for cooperating with the enemy or otherwise shirking; and
  • Resilience (that is, maintaining your membership and its governance structures over time)

*****

Before I explain these, let me just take a moment to rhapsodize about good theories. (Because this is my blog, and I can do what I want!) The world is full of thorny questions, and equally full of bad answers to those questions—as H.L. Mencken put it, “[T]here is always a well-known solution to every human problem—neat, plausible, and wrong.” It is a true joy to read a theory that suggests an answer that is utterly unexpected, and yet as you read the argument, it addresses so many features of the initial problem that the theory seems impossible to refute.

Obviously, later work can improve on even good theories. But some theories stand the test of time, and persist in their unaltered form despite the best efforts of later scholars. (Einstein’s theories are good examples. In a different domain, so is the work of Mancur Olson on collective-action problems.)

Not to suggest that Weinstein’s work is definitely in that latter category. But if it were, I wouldn’t be surprised.

Now back to our regularly scheduled program!

******

Weinstein’s model builds from the starting assumption that there are two kinds of people who might join a rebel movement: “investors” and “consumers.” Investors are willing to incur significant short-term costs for the sake of the long-term goal of victory. Consumers, on the other hand, are interested in gaining benefits today from their association with the rebel group: a salary, a gun, prestige, the chance to loot plunder, the chance to harm neighbors they don’t like. Which type of recruit predominates in a rebel group has powerful effects on the development of the group.

If a rebel group is poor, it cannot offer immediate benefits to members. As a result, consumers would tend not to join the group, having little reason to. The group’s only option, therefore, is to attempt to appeal to investors—that is, develop links to a civilian population with which it shares ethnic, communal, or ideological ties to which it can appeal to gain support and foster loyalty. This means that the group will have to build institutions of self-governance, so that the civilian populace has reason to trust that the group will protect civilians from the government and from its own members.

It is important to emphasize that getting the support of a civilian base is a strategic imperative for poor rebels, regardless of their political program, ideology, or even personal standards of morality. Those poor groups that don’t manage it will simply wither away from lack of recruits or lack of food. This task will be easier with a rank-and-file made up of investors, who are relatively more willing to submit to discipline that serves the group goals, than it would be if most members were consumers and therefore willing to break the rules for personal gain.

Weinstein also finds that poor rebel groups spend a lot of effort filtering out low-quality recruits, despite the difficulties in finding manpower. Such groups have far too much at stake to risk antagonizing civilians with undisciplined behavior, like the National Resistance Army in Uganda and the Shining Path in Peru (except for the Shining Path in the Huallaga Valley, which became enmeshed in the cocaine trade and therefore followed the “rich group” trajectory).

If a rebel group has significant starting resources, on the other hand, it will be able to rapidly gain recruits by offering them steady pay. This tends to attract a much higher proportion of consumers. It also means that the strategic imperative to gain the support of civilians is largely absent: the group can support itself even if it is hated and feared by civilians, as long as the money or guns keep rolling in. As a result, the group will spend far less effort appealing to the populace, and will also spend less effort on filtering out low-quality recruits because it incurs little penalty from undisciplined behavior that harms civilians.

Moreover, even if the group wanted to stop its forces from harming civilians, it would have a hard time doing so: because most of its members are consumers, i.e. out for immediate gain, they will tend to resist orders not to predate on the civilian populace. So the group will tolerate bad behavior by its troops towards civilians in exchange for demanding obedience on the battlefield.

Now, you might wonder what happens if a group with significant resources nevertheless managed to resist the temptation to behave badly—and instead managed to only recruit investors, impose strong discipline, build links to the populace, etc. In theory, this is possible. In practice, however, the tremendous risks that rebels take when opposing the government would make it almost impossible for them not to take the quick and easy way of recruiting a bunch of thugs to boost their manpower, if they had the cash available. Remember, most rebellions fail miserably. Immediate survival often weighs more heavily on the minds of rebel leaders that the problems of tomorrow that they are unwittingly setting into motion.

*****

The foregoing is only the first half of Weinstein’s discussion, and this post is already quite long. In future posts I will summarize his discussion of how “rich” and “poor” rebel groups differ in how they govern civilians under their control, how they punish civilians for resisting their control or for apparent collaboration with the enemy, and how they maintain their own membership over time. But you can already see where the trend is going.

******

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned fourth book in this series, working title War for Worldbuilders. No idea when it will be finished, but it should be fun!)

Beliefs About Economic Growth

10 Monday Jul 2023

Posted by in Economics, Politics for Worldbuilders

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There have been many, many books written about culture (and you should definitely read a few!), and some of them discuss the effect of culture on politics, or the economy, or both. (We already discussed Ronald Inglehart in an earlier post.) Going too far into the weeds on this topic will take us very far afield, but I did want to point out one key bit of cultural variation that has massive political significance: Do people believe that the economic pie is fixed, or that it can be grown?

If you believe that economic wealth has a fixed quantity, then you believe that no one can gain wealth unless someone else is losing it. (This basic attitude was a staple of Continental socialism. Proudhon’s “Property is theft” and Balzac’s “Behind every great fortune lies a crime” come to mind.) If so, then the key ground of economic conflict becomes “Who gets what?” The characteristic emotion toward the rich will be jealousy. All else equal, more effort will be spent in redistributive activities such as government lobbying, speculation, and sheer banditry.

If you believe that economic wealth can grow in the aggregate, then your attention will be drawn towards ways that wealth can grow. An attitude of optimism may, or may not, coincide with a certain disdain for those who could be accumulating wealth but instead allow themselves the luxury of idleness (though this disdain tends to be characteristic of societies influenced by Calvinism in particular, per Max Weber). The key economic conflict becomes “What is standing in the way of greater wealth?” The characteristic emotion toward the rich will be admiration. All else equal, more effort will be spent building businesses, engaging in commerce, and building infrastructure.

Of course, in the real world we tend to believe in a complex, contradictory mix of both. Partly this is due to our evolutionary history. Prehistoric times were typically a rough approximation of the “fixed pie” condition, because people had few possessions—and what they had often needed to be shared, for the sake of mutual survival. And during long stretches of written history, economic conditions were persistently bad as societies were ravaged by war and famine. The last two or three hundred years featured an explosive growth of affluence beyond anything in our prior experience.

Additionally, it is clear that some people become wealthy by creating wealth, and others become wealthy by taking the wealth of others. Steve Jobs, for example, became fantastically wealthy by creating whole new categories of tools for the betterment of humanity (ideally!). By contrast, Trevor Milton bilked investors seeking to participate in the electric-car boom and sold them a bill of goods. (He may not remain wealthy for long, however, depending on his sentencing in September!)

Still, those two opposed attitudes towards wealth can motivate a whole range of beliefs and behaviors—excellent grist for the fictional mill!

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders, along with some overlap with the planned third book, working title Tyranny for Worldbuilders. No idea when they will be finished, but it should be fun!)

Banking and Economic Development

09 Sunday Jul 2023

Posted by in Credit, Economics, Politics for Worldbuilders, State Formation

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If you think about the differences between a poor peasant society, a relatively affluent society such as an 18th-century English city, and a 21st-century technological society as we experience in much of the West, one of the big differences is the sheer amount of infrastructure that we have. If you think about roads, power plants and power lines, sewers, networks of schools and hospitals, and on and on, it’s a little bit staggering to think about how sheer stuff had to be built to enable our modern lives—and how much money had to be spent in order to build it all.

In poor societies of yesteryear, roads are typically mud tracks. Electricity does not exist, and people often had to cut their own firewood. What “public” facilities there were, such as single-doctor clinics, are small scale. This is not merely a question of technology. The Roman roads were tremendously useful tools of power projection (and consequently, tools of commerce), yet they remained the gold standard for perhaps fifteen hundred years in Europe because few people wanted to pay the huge amount of money it would take to extend, or even maintain, the road network. Even in major post-Roman European cities, there were no paved roads until the 13th century. (Baghdad had streets paved with tar beginning in the 8th century.)

What this means is that to take a society from abject “backwardness” to a high level of “development” (in the sense of Alexander Gerschenkron) takes not merely technology, or manufacturing ability, but the money and other resources to build the massive amount of stuff necessary.

Some types of development can be done gradually, in a decentralized manner. For example, local communities can each build a school, without necessarily needing to coordinate with other communities or a national authority. However, other types of development functioned more effectively if they were coordinated at the national level. (Or at any rate, that’s how it tended to work in our actual history, with the types of technology that we had to work with and the kinds of conceptual models that our national planners used, given the role of massive scale in the 19th and 20th centuries.) For example, the electrical grids in 19th- and early 20th-century Western European countries tended to be much more stable than those of America at the time (and even today), because the American grid was a patchwork of local grids built by local power companies, whereas the European grids were built according to a national plan, with money and resources mobilized from the entire country.

One key element in this was the role of massive banks. America had an early lead in its financial development, due to the proliferation of local state-chartered banks that soon blanketed American society. These banks were a tremendous stimulus to local and regional commerce and the development of new settlements. (The English experience was broadly similar, although it was still relatively difficult to start a bank in England.) European powers were slow to catch up, but in the 19th century settled on a strategy of having centralized national banks that would finance not merely local businessmen, but the vast infrastructure projects of modernization. America was hobbled by the system of unit banking, which tended to keep banks relatively small, and by the lack of a muscular national bank. (Such a lack was not necessarily bad, as the conflicts over the Banks of the United States indicate!)

In an era before banks, much wealth is economically sterile—golden and silver goblets sitting in some nobleman’s vaults (for example), where they do not contribute to ongoing commerce. But when such wealth is deposited in a bank, it can serve as the basis for lending and new capital investment. (It can also promote new kinds of systemic risks, but that’s a different discussion.) Banks thus can mobilize formerly unproductive resources and put them to good use. And when the bank is national in scale, it can attract the money of the vast middle and even lower classes (in the case of the postal banks of e.g. Germany and Japan) and pool the money into a vast fund, which can then be used by the state in its development plans.

Banks are not the only way to do this, of course. But in our history at least, the alternative was coercive taxation or sheer plunder by the state (as in the case of Tsarist Russia, and later the Soviet Union).

At any rate, the key point here is that to build up a society takes a lot of money, and often that money has to be pooled somehow and deployed in coordinated projects. How that process works in your invented setting is, of course, entirely up to you.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders, along with some overlap with the planned third book, working title Tyranny for Worldbuilders. No idea when they will be finished, but it should be fun!)

Building an Economy: Human Capital

06 Thursday Jul 2023

Posted by in Economics, Education, Politics for Worldbuilders, Writing

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Returning to the Labor component of the four factors of production in our quest to build a worldbuilding model of the economy, we will now discuss human capital.

Human capital, unlike other characteristics of one’s labor such as your health or general attitudes toward work, is often domain-specific. You may be a highly trained surgeon, but that would do you little good if you have to plant crops. You might be an expert at negotiating trade deals, but that doesn’t help you if you are trying to program your thermostat. In general, the value of your human capital depends on, and interacts with, the available opportunities you have to apply that human capital.

There are many kinds of human capital. In our model, we’ll focus on three:

  • Training,
  • Experience, and
  • Interpersonal skills.

Obviously, this categorization is artificial. Distinguishing between training and experience is not always easy or useful. And the development of interpersonal skills is influenced by training, but also by cultural context—both in terms of what is considered proper etiquette in that culture, and in terms of whether the culture encourages values like teamwork, taking responsibility, giving proper credit, and politeness or other values such as saving face, kiss-up-kick-down, dominance, and rigid separation of roles. So interpersonal skills should strictly speaking interact with the “Culture” factor of labor in our model. Nevertheless, as a scaffold for our thinking, we’re still going to use this three-part division.

Experience and interpersonal skills are fairly self-explanatory. (Some people develop particular skill in working with others, in a way that measurably shows up in company performance, and these skills can be learned; see Crucial Conversations: Tools for Talking When Stakes Are High.) In the rest of this post, we will be discussing training in particular, and focusing on a key question that has wide-reaching implications: who bears the costs of a worker’s training?

(Note: “costs” include actual money, but also instruction time and effort, the frictions involved in assigning real work to a trainee, and the like.)

Following Kathleen Thelen’s book How Institutions Evolve, we can talk about three kinds of vocational skills: general, industry-specific, and company-specific. General skills are widely applicable, such as literacy or basic computer skills. Company-specific skills, on the other hand, are only useful within a particular company—how to use a custom inventory system, for example. Finally, domain-specific skills are useful within a specific industry.

Because general skills make a worker more valuable across industries, a worker who gains general skills is more likely (all else equal) to leave her current employment and find a better offer. As a result, employers will generally not want to pay for their employees to gain general skills (all else equal), because even though they would benefit from having skilled employees, those employees are likely to be poached away and the current employers are less likely to keep the benefits of such skills. The employees, on the other hand, will want to pay for general skills because the risk is low: even if their current job goes away, the skills will be useful to many other employers. Employees thus get the benefits of having general skills, and are willing to pay for them (if they can afford it!).

For company-specific skills, companies have a much easier time paying for workers to develop them; the skills only have value within that company, so training your workers makes them relatively less likely to leave. As long as the employer is confident that a worker will remain, and as long as company-specific skills would actually be useful, the employer is likely to pay for such training. The employee himself is relatively less likely to pay for company-specific skills, for that reason.

But when we consider domain-specific training, we have a problem. If the worker bears the cost of his own training, he also runs a relatively high risk that no one will hire him for that job even after he is trained (since it only applies to one industry). If so, the cost of the training will be wasted, since he would not be able to apply the specialized training in a different domain. As a result, the worker will be less willing to bear the cost of his own training unless he had some sort of assurance that the investment would pay off.

Conversely, if the employer bears the cost of training a new employee with domain-specific skills, she runs the risk that the employee will receive all the expensive training and then happily jump ship to a different employer, or strike out on his own, or simply underperform at his new job. The employer will be unwilling to spend lots of resources training employees unless she had some sort of assurance that they would remain with her, and perform up to par.

This is probably why medieval Europe featured long apprenticeships and state-sanctioned professional guilds—apprentices could devote years of their life (but did not have to pay money) to learning a trade secure in the knowledge that their master would employ them (albeit under bad conditions), and the master could invest the considerable effort needed to train an apprentice secure in the knowledge that the apprentice could not run off early and ply his trade elsewhere, because the apprentice could be imprisoned or even executed. The apprentice was locked into his contract for several years, long enough for his master to reap the benefits of his growing skill.

On the other hand, there are significant drawbacks to the apprenticeship system. First of all, the master is taking a big risk—what if you turn out to be really bad even with training, or dishonest, or just unpleasant to be around? Second, the apprentice has to sacrifice many years of his life toiling for someone else—and what if the master is cruel, or incompetent, or just bad at business or teaching? Why not take opportunities to abandon your master and improve your life?

Most of all, an apprenticeship system requires overpowering coercion to work—either from a powerful state that enforces contracts between master and apprentice, if you’re lucky enough to live under one, or else a social milieu that tolerates private violence by masters and guild enforcers against the hapless apprentices. Or perhaps both.

In modern times, we typically use other means, which have varying levels of success and different outcomes. Here, we’ll talk about two models, and call these a “liberal” labor system and an “organized” labor system.

In a stylized “liberal” labor system where workers can move between companies and industries without restrictions, companies have less assurance that they will be able to keep workers around after they have been trained; as a result, companies tend to invest relatively little in workforce training (except for company-specific skills), and workers themselves are encouraged to finance their own training.

Workers, for their part, will therefore tend to invest in general skills that do not depend on a particular employer or industry, as they have a higher likelihood of benefiting from such investment wherever they end up. They will also invest (where possible) in especially valuable skills that are industry-specific (such as computer programming), because the expected return from such investment is still positive even with the uncertainty of the payoff.

But less valuable industry-specific skills (such as trades) will tend to be neglected. Moreover, the skill development of the workforce as a whole will largely depend on the workers’ ability to invest in their own skills. If they lack the funds, the time, or the access to credit, workers will not be able to get all the skills they want. (This is a particular problem at the beginning of your career, when you have no money!) As a result, a “liberal” system will tend to produce a workforce with reasonably levels of general skills and highly valuable industry-specific skills, and a large gap of skills in the middle.

One way to address this gap is for the state to provide free or subsidized education to younger people, especially to fund the development of general skills. Unsurprisingly, in the United States over half of the workforce has college degrees, while only perhaps 35% of German workers do (and many of these are professional degrees, rather than what Americans would recognize as a liberal-arts degree).

Another way is for companies to offer strong incentives for employee loyalty, partly mitigating the poaching problem. Examples include the Japanese system of worker seniority, or the common practice among American startups to offer restricted stock compensation that vests over several years.

By contrast, in a regimented system of long-term employment with few opportunities to switch jobs (what Thelen calls an “organized” system, as one finds in Germany), companies will be assured that they can capture the benefits of training investments; each company will therefore train its employees to the level that the company needs (or thinks it needs). However, workers themselves will tend to underinvest in their own skills; because of the limits on job choice, they will not reap all the benefits of such investment.

As a result, an organized system tends to produce a workforce that has good basic and “middle” domain-specific skills, but lacks skill on the high end. (In Germany, for instance, nearly half of workers have attended vocational schools, often funded by their future employers. Germany also features industry groups that collectively manage worker training, and agreements between companies to manage worker poaching.)

****

The upshot is that a skilled workforce doesn’t spring from the ground fully formed. Someone has to bear the costs of training, and that someone has to be confident that she will reap the benefits of that investment. There are several ways to resolve the resulting problems, but each of them will result in a characteristic pattern of skill development—and such patterns can add texture to your invented societies.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders, along with some overlap with the planned third book, working title Tyranny for Worldbuilders. No idea when they will be finished, but it should be fun!)

Factor Mobility and Political Conflict

25 Sunday Jun 2023

Posted by in Economics, Politics for Worldbuilders, Writing

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In an earlier post, I mentioned the argument of Michael Hiscox that whether investment capital is mobile or immobile will play a big role in the way that political conflict over the economy plays out. The truth is, Hiscox argued that the same basic principle applies to all the factors of production.

Human capital too can be of general usefulness, like being able to read, or it can be highly specialized, like knowing how to audit the internal reports of a McDonald’s franchise. Empty land near a city could be used to grow crops or graze cattle, or it could be repurposed for housing or a factory; but land in the middle of a swamp can’t be used for much except fishing or peat harvesting. Even people themselves might be mobile or immobile, depending on how easy transportation is between where they are and where they might want to be. (Hiscox references the Law of One Price in describing this tendency.)

We noted in the earlier post that if capital is inflexible, then it cannot easily shift between industries and people will fight hard to defend their own industry against competitors; politics thus features intense lobbying and narrow sectoral factions, with the bosses and workers largely allied to defend their own niche. By contrast, if capital is flexible, then if one industry is having trouble, investors will simply shift their capital to a more profitable industry with a minimum of fuss. Thus, politics shifts its focus to broad, class-based coalitions (workers versus owners, haves versus have-nots). (Additionally, flexible capital is better able to serve as collateral for lending, while in its absence entrepreneurs are forced to rely on equity finance, which is more difficult to get.)

Essentially the same is true for the other factors of production. Labor and land, too, have different political effects based on how easily they can be repurposed. Ease of transportation plays a particular role in allowing resources to equalize between different regions or different industries. So does the state of technology; if workers can easily adapt to the machinery in different industries, it is much easier to shift people around than if machinery is highly specialized and takes a long time to master.

Hiscox notes that political conflicts over the economy thus follow some consistent patterns based on the level of technological development of a society. In a preindustrial society, the factors of production are relatively immobile: knowledge of a trade doesn’t transfer well, most industrial capital is immobile and difficult to repurpose, and transportation is slow and risky. In particular, money itself (e.g. gold and silver bullion) is tricky to move around, which limits the ability of investment capital to flow into poorer regions where there might have been good uses for it.

As a result, capital and labor do not readily shift between industries or regions, with the result that you often see guild rivalries and conflicts breaking along professional lines, with class conflict as such usually taking second place. (This does not mean that it never happens; for example, the Bauerenkrieg or Peasants’ War of c. 1524 was largely kicked off when German nobility put in place new laws on land ownership to force the free peasants into serfdom.)

Early industrialization, by contrast, makes factors of production much more mobile. Transportation gets much easier, reducing frictions in shifting factors of production between regions or from one use to another. Unskilled people can more easily move between industries, since basic factory work is similar across industries in this stage of industrialization. Similarly, advanced education becomes useful in a wide range of industries, and someone initially educated to be a priest could readily become an engineer, scientist, diplomat, and statesman. Capital likewise becomes much more mobile, as much industrial equipment is relatively multipurpose.

It is no accident, says Hiscox, that mass politics based on class divides becomes much more salient in the period of early industrialization. (For example, Marx’s argument about the role of unemployed workers as the “industrial reserve army” of capital would make no sense in a preindustrial economy; unemployed weavers could not magically become potters or shipbuilders.)

Later industrialization causes factor mobility to decline again in relative terms. Human capital becomes much more specialized (for example, a growing number of Americans today are seeking master’s degrees, professional degrees, and PhDs, finding that a “mere” bachelor’s degree is not enough for their needs). So does productive capital (for example, the cost of building a single semiconductor plant can be as high as $10 billion!). Also, specific forms of human and technological capital can only be used with each other—a computer programmer is useless without a computer, and an astronomer cannot function as such without massive telescopes. So, says Hiscox, class-based political struggles tend to decline, and industry lobbying rears its head again.

(Hiscox notes that government policy can improve factor mobility, as in Sweden, and allow class coalitions to persist—and at the time of his writing, Sweden was able to respond to economic shocks much more rapidly as a result, particularly through wage equalization between industries.)

Since Hiscox wrote, I would argue that we have seen a relatively unbalanced situation develop where parts of the economy are getting more flexible, and other parts of the economy are getting more inflexible. It is far easier today to invest in, say, a broad-based ETF of Chinese companies than it was thirty years ago, and just as easy to yank your money out with a few mouse clicks. But building a factory now requires highly specialized robotic equipment, some of which is impossible to use in any other industry. A general grounding in basic computer use or marketing skill can be applied in many different industries; and at the same time, to be a physicist or biomedical researcher now virtually requires getting a PhD first, where in earlier times you could get started with a bachelor’s degree or even be entirely self-taught.

No surprise that our modern politics feature a weird mixture of class-based politics and sectoral-lobbying politics, in a volatile and high-temperature mix that makes it much harder for any political conflicts to be resolved.

*****

At any rate, Hiscox’s model gives you a handy lens to think about how factor mobility can affect the politics of your own invented worlds. In particular, if you want to have class conflict in your story, make sure that the economic environment is conducive to such conflict, as opposed to conflict between competing guilds, for example.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

The Structure of My Next Worldbuilding Book is Coming into Focus

17 Saturday Jun 2023

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The hardest part about writing my books for worldbuilders hasn’t been the content (which is basically vomiting out cool things I learned while studying for my PhD, and since)—it’s been figuring out how to structure the content. I beat my head against the wall for several years while working on Volume 1 before I finally settled on a structure that made sense, with each chapter building on and augmenting what came before it. More recently, I decided that I needed to break the planned Volume 2 into two separate books, since the “Commerce” material didn’t really fit with the “Tyranny” material. Ever since, I’ve been trying to figure out how to organize the chapters in “Commerce.” (Also, what the title should be! But that’s less urgent.)

At about 5:00 this morning (because of course it was…) I think I may have figured out the structure. First, I need to keep in the forefront of my mind that it’s not a book about economics, per se; it’s a book about how people organize themselves to better use resources, and the conflicts in so doing that we writers can exploit. (Yes, that’s part of economics, I know, I know! But I’m less concerned with, for example, demand curves or monopolistic markets or such like that. I’m not trying to write an economics textbook, I’m trying to write a resource for worldbuilders.) That gives me a landmark to orient with, to help decide what material needs to be in the book, and what material needs to be cut.

(For one thing, I need to more explicitly discuss government’s role in affecting transaction costs, for good and ill. I’d been groping in this direction before, but didn’t have a clear picture of where such discussions would actually go in the book, or what function they would play. Still, I had a nagging feeling that it would remain relevant. My subconscious is pretty smart, but I wish it were better at communication…*)

Second, I think at a high level, the book should begin with the discussion of energy surpluses as in my previous plan, but thereafter it would be organized around the four factors of production: Land, Labor, Capital, and Entrepreneurship. That gives me a neat framework to slot in more niche subjects like the governance of pirate ships (i.e. entrepreneurship) or the functioning of the stock market (i.e. capital) and have it make sense in the larger flow.

Starting with Land would also be very useful for worldbuilders, since it should help people draw their fantasy maps and figure out where everything needs to go. I’d be putting the discussion of cities in Land, as well as related things like ease of transportation. It’s all very concrete and immediately helpful, as opposed to the topics that will now go under Entrepreneurship such as uncertainty and transaction costs. Those latter topics will now make a lot more sense to the reader, since they will come after a lot of discussion of specifics. Starting with them would have been much too theoretical.

So, not much of consequence in this post—other than to report that progress is happening in the book project, and perhaps to solicit feedback from you, Gentle Reader!

* For one thing, my subconscious somehow understood that the topic of self-defense was important to Right Authority well before I even decided that RA would be my dissertation topic—but it neglected to tell me how it was important until three years later!

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

Asset Values and Interference by Others

13 Tuesday Jun 2023

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Let’s say you have a merchant caravan of spices, going through dangerous territory. The success of your venture is partly, or even mostly, dependent on the actions of many other people. The spice dealer can choose not to sell you spices in the first place. The caravan workers can threaten not to work, or to run off with your spices. A bandit can threaten to rob your caravan; a government bureaucrat can threaten to deny you entry to your destination. Each of these sources of vulnerability will depress the expected value of your spices—unless you can mitigate the risks somehow.

Douglass North makes a key point on this subject in his book on institutions. We have said that uncertainty tends to lower the price of an asset, because the expected value of the asset—the likelihood that you will actually enjoy the benefit of owning the asset—is reduced. But uncertainty can come from several sources. Some uncertainty is “natural,” such as the chance of bad weather harming a wheat field’s harvest. But some is intentional: other people acting to damage or take your asset. North states that in general, the price of an asset will be reduced the more that other people are able to affect its value.

North states that the most efficient way to mitigate the risks that other people pose to your asset is to give each party a cut of the action—to give them incentives to cooperate with you. (Strictly speaking, he says that you should give each party property rights in the asset; but he’s using “property rights” loosely, to mean “a share in the benefits.”)

So you would pay the spice dealer a high enough price to induce her to sell to you; you would pay the caravan workers a high enough wage that they will not be tempted to shirk. You might pay the bandit a toll high enough that he doesn’t want to risk his life fighting for more (and if enough other people do this, the bandit might “go legit” and set himself up as ruler of a petty state controlling that part of the road). And you would pay the government bureaucrat (legally or illegally) to let you into the city.

And despite all of the money you’d be paying out, North says, you’d still end up making more money (on average) than if you decided to bear the risk yourself. True, if you managed to dodge all the dangers without paying, you’d be fabulously rich. But the chances of disaster would eventually catch up to you, which is why the expected value of your spice venture would be so low at the beginning.

Of course, you could decide to deal with your problems in a less cooperative way. You could deter the bandit by outfitting your merchant workers with guns, for example. You could try to smuggle your spices into the destination city, rather than paying off the bureaucrat. You could steal the spices rather than buying them. North, being interested in how people deal with property rights, is less interested in these solutions, but we as authors have a larger toolbox to work with—especially since we like conflict in our stories!

So this was just a quick post discussing another cool conflict that you can explore in your stories: all the ways that a hero’s venture can be stymied by other people, and how your hero manages to reconcile all the diverging interests. (This might be by killing off all the interfering people, depending on your story!)

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

Building an Economy: Labor and Motivation

06 Tuesday Jun 2023

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We return at last to our discussion of the Land/Labor/Capital triad of the factors of production (plus entrepreneurship, which is nowadays considered its own factor). We’ll start with a broad overview of Labor as a factor of production, and then zoom into the role of motivation on labor productivity.

Labor is unlike other factors of production like raw materials, for two main reasons:

  • If you don’t use an iron bar today, you can use it tomorrow; but if you don’t work today, that work potential is gone forever. You can work tomorrow, but you could have worked tomorrow even if you also worked today. That is, labor is a perishable resource. (It’s also a flow, not a stock; you have a maximum intensity of work that you can do at a given time, and you can’t “store extra work” for later.)
  • Unlike resources like wheat, or gold, or cars, which are largely interchangeable with other units of the same resource, one person’s labor is not the same as another person’s labor. Our labor is affected by individual skill, training, motivation, and differing opportunities to apply that labor to useful work. Labor is thus heterogeneous. (Indeed, one of the trickiest problems with labor is the difficulty in measuring labor outputs, and in assigning people to where they can do the most good—a great source of frustration when you’re out of a job!)

As we are trying to build a simple but powerful model of a fictional economy for worldbuilding purposes, rather than trying to exactly describe the real world in all its messy glory, we’re going to identify three major factors that influence the labor productivity of a society:

  • Human capital,
  • Physical strength and health, and
  • Culture.

The rest of this post will discuss the impact of culture on labor productivity—and particularly, cultural influences on our motivations for working.

Culture has many effects on labor productivity—for example, whether individual initiative is rewarded or punished, whether people are used to teamwork and obedience or if they resist authority, whether people are diligent and careful in their work or take a slapdash attitude towards maintenance. (The eminent economist Thomas Sowell noted that in the early United States, a Scots-Irish Southern “cracker” would walk around or through a creek running through his property for years on end, without any thought of improving the situation; whereas a Puritan-descended Northerner would almost immediately build a footbridge. This is but one example of the larger pattern identified by Max Weber in his Protestant Ethic and the Spirit of Capitalism.)

All of that is important, but for now we will focus specifically on motivation. Different people are motivated by money differently, as John Médaille discusses. Médaille, in Towards a Truly Free Market (a fascinating argument for the Catholic-infused economic doctrine of Distributism), points out that employment is unlike most commodities in that “[l]owering wages does not [automatically] increase employment; only the prospect of selling more goods induces employers to take on more hands.” On the flip side, wages cannot rise arbitrarily high; at a certain point, either profit rates will go to zero (causing capital to withdraw from that industry in search of better returns elsewhere), or wages will rise above the capital substitution rate, i.e. the point where it makes more sense to spend money on infrastructure and robots than on people.

Moreover, unlike other commodities where rising prices stimulates more supply, higher wages will not automatically elicit more effort from people. In some cases, it actually reduces effort. Médaille presents three stylized models for worker motivation:

The surfer works only as much as needed. Once he earns enough money to feed himself and see to his other necessities in a minimal way, he stops working and goes surfing for the rest of the week. If you want to elicit more work from a surfer, you would actually need to pay him less. (This tendency occurs in many peasant societies. In 19th-century Germany, the ruling-class Jünkers found that they could increase agricultural yields by suppressing peasant incomes to a level of utter misery, forcing them to work more in order to survive; if they paid the peasants more, on the other hand, yields dropped as the peasants simply drank away the surplus.)

The homebuyer has goals: he wants to achieve a certain level of material comfort (such as buying a home), to take care of the family and achieve some level of social status. Increasing pay will elicit more work from the homebuyer as these goals become achievable—but only to a point. Once pay is high enough and the goals are achieved, the homebuyer will not continue to increase work output and may even start to reduce output at the high end, as other things (leisure time, time with family, social involvement, etc.) become relatively more important than another few thousand dollars in the bank.

The oil rigger, on the other hand, is highly motivated by money and will work more if he gets more of it. At a time in his life where he has few other commitments, the oil rigger is willing to work incredibly hard in exchange for incredible pay, with the plan of benefiting from the accumulated money later in life. The more you pay the oil rigger, the harder he will work, until the point of sheer exhaustion. Cut the oil rigger’s pay, on the other hand, and he will leave in disgust to find better opportunities elsewhere. (See also investment banking, many commission-based jobs, and so on.)

As a result, the productivity of a given society’s workers will be influenced by the relative proportions of Surfers, Homebuyers, and Oil Riggers among its workers. So what determines that proportion?

Ronald Inglehart’s 1997 book Modernization and Postmodernization argued that societies exhibit coherent patterns of cultural development that are partly predictable, based on economic conditions that allow for and stimulate cultural change. This change generally happens across generations; people’s values are usually set by their experiences in childhood and early adolescence, and do not change much as they get older. But in times of rapid economic change, the values of the next generation can differ significantly from those of their parents. Moreover, even though economic conditions make cultural change possible, the resulting cultures also have an independent influence over later economic performance.

A key argument is the scarcity hypothesis: people tend to most value things that are in the shortest supply. In a time of social disorder, people will value authority and tradition; in a time of poverty and starvation, people will value material things. In a time of material abundance but soul-crushing conformity, people will value self-expression and autonomy. And these values persist once they are stamped into a person during adolescence and early adulthood, even as external conditions change.

In this book and in later research, Inglehart argues for two discrete axes of broad cultural variation between societies (and to a much weaker extent, between individuals): traditional versus secular-rational values, and survival versus self-expression values. (He initially thought that these axes were independent of each other, but later research suggested that they correlate strongly.) A society with “traditional/survival” values is a Traditional society, marked by deference to tradition, low economic growth and consequently significant poverty and insecurity, and little importance placed on political rights or personal fulfillment.

In a society with growing wealth, increasing state capacity, and bureaucratic organization, this cultural pattern gives way to the “secular-rational/survival” configuration, which Inglehart calls Materialism. In short, the spread of rational methods and organization is thought to bring true prosperity into reach—all we must do is work hard to achieve it. As a result, traditional authority is displaced by Science, Industry, and the State, and people develop strong work ethics beyond what are typically found in traditional societies. Work brings reward, and so the more you work, the better you are rewarded.

As wealth grows even more, societies reach a point where increasingly hard work no longer yields as much marginal benefit. Material safety is now taken as a given by those who grew up with it; this new generation shifts from a survival mindset to a self-expression mindset, which Inglehart calls Postmaterialism. This generation lacks the focus on material reward that marked their parents’ work ethic; they work in order to express their values, not merely to feed themselves, and are not as willing in the aggregate to spend nights and weekends in the office for the sake of higher pay.

(Obviously, Postmaterialism depends on the material prosperity that enables it. If material conditions suddenly regress, a cohort with Postmaterialist values will struggle to adjust, and the social consequences of this struggle may be dire.)

So as worldbuilders, we can think about the cultural attitudes at play in our invented societies, and how they will influence labor productivity and the economic development of the societies. There are some fun stories that can be told on these themes; can you think of any?

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

Uncertainty and Institutions

04 Sunday Jun 2023

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The world is a complicated place. Especially when you are dealing with lots of other people, it can be very hard to predict how other people will act. And that, in turn, makes it very difficult to plan what you are going to do. Which then makes it harder for other people to predict how you are going to act, and so on.

With all of this uncertainty, how do we manage to function during the day? And just as importantly, how do we make long-term plans for the future, such as building infrastructure or growing food? As Douglass North writes in his book Institutions, Institutional Change, and Economic Performance, we use institutions to reduce the uncertainty of our interactions with other people. As a result, the structure of a society’s institutions plays a huge role in its economic and social functioning.

(If you read my book Beyond Kings and Princesses: Governments for Worldbuilders, you might remember that a good chunk of the book was inspired by Violence and Social Orders, by North/Wallis/Weingast; this is “North” of that trio.)

In a nutshell, here is North’s argument: in a vacuum, there is often too much uncertainty to permit voluntary interaction between people. Institutions are created to reduce uncertainty. Then organizations form or entrepreneurs make deals to take advantage of the possibilities created by the institutions, and the feedback from same gradually changes the institutions.

Some institutions are formal, such as laws, rules, regulations, religious doctrine, and the like. Some are informal—North identifies three kinds: (1) extensions or modifications of formal rules, (2) social norms, and (3) personally imposed standards. Either kind of institution can be created for many reasons, and formal institutions in particular often are created for self-interested reasons by those in power. As North puts it, “Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to devise new rules.”

Nevertheless, institutions have the effect of reducing uncertainty, by giving us stronger beliefs about how other people will act in a given situation. Because of this, environments of high uncertainty (such as quickly changing social or environmental settings) often drive people to create new institutions, either formal systems or new belief systems.

(That need not always be socially optimal; a cultural belief that “my countrymen will deal honestly, but foreigners will always rob and murder me” would certainly reduce one’s felt uncertainty in both directions, but probably would not be helpful overall—unless the foreigners in question would actually do so!)

Reducing uncertainty has the effect of reducing transaction costs in commerce—particularly the costs of gathering information, forming agreements, and enforcing them. This is a significant issue; many of the weirdest parts of our own economy are the result of difficulties in gathering information. (Think of how hard it can be to find a job or hire people, for example.) Thus, lower transaction costs can dramatically encourage economic activity.

Okay, but what happens next? North is particularly interested in the feedback process between institutions and the people acting in light of them. In particular, entrepreneurs can sometimes perceive new opportunities that exist thanks to a given institution, take advantage of the opportunity, and therefore incrementally change the environment, creating new opportunities etc.

(For example, Jared Rubin writes about how a financial instrument first created in Muslim lands, the bill of exchange, was gleefully adopted by Christian merchants to evade currency controls between countries and served as a key impetus for the development of international banking in Europe.)

There are limits to such incremental feedback, however. North writes, “Individuals act upon incomplete information and with subjectively derived models that are frequently erroneous; the information feedback is typically insufficient to correct these subjective models.” Additionally, some institutions are designed not for economic efficiency, but to facilitate exploitation and oppression; these institutions actually raise transaction costs. Entrepreneurial adaptation can help ameliorate their effects, but only to a point. Finally, some well-meaning institutions are so flawed that no amount of adaptation can make them useful, and some kinds of adaptation can actually make them worse. (America’s short-sighted regulatory policies around housing finance, and how they sowed the seeds of the 2008 financial crisis, come to mind.)

Another key point that North makes is the importance of path dependence. In short, a given institutional environment will reward some kinds of activity and discourage others, which will in turn cause future development to lean in a particular direction. Examples:

  • If there is strong rule of law and enforcement of contracts, there will be more impersonal economic exchange. If rights are weak, on the other hand, people will tend to exchange only in trusted networks. This will weaken the future development of economic networks.
  • Insecure property rights will encourage the development of technologies that have low sunk costs, and are mobile. This also discourages long-term agreements.
  • The advance of knowledge is in large part path-dependent. Knowledge influences ideology, which guides the search for knowledge.

And once a given institution is in place, it is often difficult to change. As W. Brian Arthur pointed out, there are at least four processes that make it less likely for people to change systems once put in place: large fixed costs; domain-specific learning; coordination effects; and adaptive expectations.

*****

What are some takeaways, especially for worldbuilders? First, every time that you think of some new organization or new law or new environmental condition, spend time thinking about how self-interested people will react to it—and how other people will react to them, and so on. Second, remember the importance of reducing uncertainty.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)