Tag Archives: political economy

Uncertainty and Institutions

04 Sunday Jun 2023

Posted by in Economics, Politics for Worldbuilders, State Formation

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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.

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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.

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(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: Different Property Regimes

28 Sunday Aug 2022

Posted by in Economics, Politics for Worldbuilders

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Let’s say you’re worldbuilding a new setting, and you want to experiment with a different kind of property system than feudalism or bourgeois property. Presumably, you want a property system that leads to more humane results and better use of resources—or maybe you want a system that encourages waste and oppression, the better to foster story conflict! So what kinds of systems are out there, and under what circumstances do they tend to have good or bad results?

It turns out that different kinds of things work better under different kinds of property regimes, shockingly enough. In particular, economists tend to point to two features of a good: whether it is excludable, and whether it is rivalrous. “Excludable” means that you can keep people from using the good. For example, I can prevent you from driving my car; but I can’t prevent you from breathing the air (which is nonexcludable). “Rivalrous” means that if one person uses the good, another person cannot. For example, if I eat an apple, you can’t eat the same apple. But if I listen to a radio station, you can listen to the same radio station without interfering with me.

I can already see your eyes glazing over; so let’s give an illustration:

Archdruid Thorne strode into the shrine, his eyes briefly glancing at the throngs of worshippers forlornly waiting outside the sacred building. Commoners were not allowed inside the shrine, forbidden to benefit from the life-granting energies it generated. They could only make offerings of food and coins at the door, in the hopes that one of the druids would deign to bring out a Stone of Life, which would heal illnesses of all who stood near it (no matter how common)—for a brief time.

Even though the druids jealously guarded their powers, still the mere presence of the shrine benefited the region. The air was cleaner, the rain was gentler, and the animals in the area more fertile and easily captured. So the people might grumble about the druids’ arrogance, but not very loudly.

Thorne sniggered. Today was the day, the day when he could finally unseat High Druid Ferrus and seize the Ring of Command for himself. Only one finger might wear the Ring of Command, and now that finger would be Thorne’s.

So, in this model we end up with a good old 2×2 matrix:

  • A good that is rivalrous and excludable (like a gold bar, or a chocolate cake, or a sleeping bag, or a bottle of water) is called a private good.
  • A good that is nonrivalrous and nonexcludable (like clean air, or a radio station) is called a public good.
  • A good that is nonexcludable but still rivalrous (like water in a river, or fish in the ocean) is called a common-pool resource.
  • A good that is excludable but not rivalrous (like a website behind a password, or membership in a museum) is called a club good or toll good.

(This model is a blunt instrument, but it still helps us grapple with some important concepts.)

Entire books can be and have been written about each of these concepts. For now, let’s examine common-pool resources a bit more.

In 1968, biologist Garrett Hardin published a hugely influential article, “The Tragedy of the Commons.” In it, he presented a type of economic good called a commons, and argued that relying merely on private property regimes to regulate its use would result in disaster. In his example, several herdsmen share a meadow, the “commons,” to graze their animals. If grass is plentiful, each herdsman has an incentive to add more animals. But if everyone does this, eventually the grass will be overgrazed and the commons will be destroyed. Thus, concludes Hardin, in a situation where private actors have incentives to overuse a shared resource, only government regulation of the commons will preserve it for the future and ensure that people benefit from it optimally. (Specifically, he was arguing for government-enforced population controls—”Freedom to breed is intolerable,” as he put it. But the argument is more general.)

This article became a powerful justification for government regulation of all kinds, and particularly regulatory regimes controlling natural resources. In response, as the incompetence and hubris of many government regulatory schemes became apparent, free-market economists led a push for deregulation in favor of private property. The argument was that, as Milton Friedman stated, “Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.”

As true as this is, it is incomplete. Unfortunately, not all goods function well as private property. In practice, government schemes of privatization sometimes work well, but sometimes amount to expropriating a common good and granting it to some well-connected oligarch for pennies on the dollar. (Or kopeks on the ruble, to be precise.)

Sadly, it took until Nobel-Prize economist Elinor Ostrom’s 1990 book Governing the Commons before policymakers understood that there are more options when dealing with resources than just private property or government control. Ostrom clarified the idea of a common-pool resource, such as fish in a lake or water in a river, which can be accessed by many people, and depleted by use. She argued that common-pool resources were often managed more effectively by their own users, cooperating with each other, than by government bureaucrats who often had little understanding of what they were doing. (Governments can still play a role, by providing resources to the locals or enforcing their mutual contracts, for example.)

I’ve not seen much fiction that featured communities of people stewarding a common-pool resource, but it’s a fertile area for stories. The management of a common-pool resource is perfect for generating story conflict. Will the users moderate their use enough to keep the common pool viable? Will some people try to cheat, and extract more resources than they are allowed to? Will the users face a sudden problem like a drought or poachers or the failure of the Standing Stones of Wisdom, and will they be able to converge on the right response? Might the local government try to seize control of the common pool, believing in its arrogance that it could do a better job of managing it than the users—or perhaps simply to extract taxes?

One more idea to chew on, just because I personally like it. In The Cathedral and the Bazaar, a book about open-source software development. To explain why many programmers work on open-source software for free and release such software for anyone to use, Eric S. Raymond discussed the concept of a bazaar good. Briefly, there is a relatively small class of public goods with the property that their creators gain enough utility from creating them that they would do it without needing to sell the good—and the goods also also become more valuable to the public as more people create them. Obviously, writing certain kinds of software is the most common example.

I’ve often mused that government subsidies might be redesigned to create new classes of quasi-bazaar goods, and achieve more efficient results. I’m not sure how, but fiction is a good place to noodle over such things.

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(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 Tyranny for Worldbuilders. No idea when it will be finished, but it should be fun!)

Building an Economy: The Struggle Between Urban and Rural

10 Tuesday May 2022

Posted by in Economics, History, Politics, Politics for Worldbuilders, State Formation, Writing

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As Trotsky noted, much of politics is about “who and whom?” In other words, which social group gets to benefit at which other group’s expense? This plays out vividly in the conflict between rural farmers and city workers—and governments often take the side of the city. This clash of interests can be a fantastic engine for fictional conflict, in your stories and your worldbuilding.

(This post is largely based on Robert Bates, Markets and States in Tropical Africa, with some flavor from Charles Tilly, James C. Scott, and David Graeber.)

We said before that cities play important roles in generating wealth and projecting state power, but that their size is limited by their access to food (or more abstractly, the energy surplus of the society). This also means that city dwellers and farmers have precisely opposite interests with regard to the market price of food: farmers are selling food and would like a high price for their crops, but city dwellers must buy food and want a low price.

Another limiting factor is capital, the fuel not for people’s lives but for their ability to produce goods and infrastructure. (This often takes the form of money, but remember that money is simply a convenient representation of other things people need—natural resources, machines, human labor, et cetera.) This presents a problem for state rulers in a dangerous world: if they want to develop modern industries and manufacturing in a country that is presently agrarian, where do they get the capital from? Often, the best available source of capital is the rural farmers—who might be individually poor, but still collectively have the largest available source of capital: their crops.

Worse, keeping the cities happy is often far more important to states than is keeping rural provinces. The reason is simple: the state officials are in the cities. If the state antagonizes a bunch of farmers a hundred miles away, they can do little to the state officials; but if the state antagonizes a bunch of city dwellers, the city dwellers will riot and perhaps lynch state workers or even overthrow the government entirely.

Thus, states trying to build up their cities must somehow balance off three competing priorities:

  • keep food prices low;
  • extract capital from the rural populace and use it to develop city industries (or perhaps to build a military, or other purposes); and
  • don’t leave farmers so poor that the food supply dries up.

In ancient times, this was done straightforwardly. Taxes were levied on food directly, which the government then distributed to its own personnel and to associated artisans; and people were also drafted for terms of forced labor (“corvée labor”), their own bodies providing the capital that the state needed. (The Bible, for example, attests to people being drafted for three months out of every twelve during the period of King Solomon’s great building projects.) If taxes became too burdensome, the people would resist, but as long as the state didn’t push the populace to the breaking point they could access a fair amount of resources with little trouble.

In more modern times, states had some fancier tools available. Robert Bates writes of postcolonial African states, which were able to make use of a preexisting colonial institution, the monopsony—a single buyer which farmers were obligated to sell all of their cash crops to at a given price. (As opposed to a monopoly, a single seller of a good.) This allowed states to extract foodstuffs from the rural populace at artificially low prices, which could then be sold to urban workers or exported for cash. (To do so, they often had to ban export of crops as well when the world market price was higher than what they were paying.) This meant that urban workers could pay low prices for their food, and the state had lots of capital available for economic development (or other, less useful purposes).

But how to sustain the farmers if you’re paying dirt-cheap prices for their goods? The answer was to subsidize farming inputs, such as machinery, fuel, and access to cheap credit. This had the additional advantage to the state that you could direct the subsidies to chiefly benefit your own supporters, often wealthy members of the government who entered farming specifically to soak up all the subsidies they could. In practice, therefore, a regime of subsidized inputs and too-low output prices would squeeze the peasants while benefiting large farms owned by elites.

(Meanwhile, farmers often resisted by shifting some of their crop production to goods not covered by the monopsony, and by selling some of their goods on the black market. Bates estimates that no more than 30% to 40% of agricultural production was captured by the monopsonies, on average.)

Such systems in real life often performed worse than expected, because the states’ programs of economic development were poorly run, frequently corrupt, and prone to pursue prestige industries such as heavy manufacturing that were impossible to sustain with the countries’ given level of technology, human capital, and infrastructure. But that is a story for another post. For now, the point is to highlight the conflicting interests between urban and rural populations—and how the state, trying to augment its own power and economic resources, will favor the city over the countryside.

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(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 Tyranny for Worldbuilders. No idea when it will be finished, but it should be fun!)