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

Adam Smith on Escaping the Violence Trap

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

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Page 1: Adam Smith on Escaping the Violence Trap

The Earl and Edna Stice Lecture February 7, 2014 1

Adam Smith on Escaping the Violence Trap

Barry R. Weingast Stanford University

February 7, 2014

The Earl and Edna Stice Lecture

In the Social SciencesUniversity of Washington

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Introduction

In 1776, Adam Smith asked in his famous work, The Wealth of Nations, what accounts for the differing levels of the “opulence” in nations? Why do so many countries remain poor?

With the seeming intransigence of high levels of poverty throughout the world: This question is as relevant today as in Smith's

time So too is Smith's approach to this question.

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Introduction

The essence of the “Violence Trap”:Josiah Ober summarizing Thucydides, The Peloponnesian War:

• To survive, a community needs a wall for protection.

• Walls require money. • But how to get money? • Trade or plunder. • To do so, you need ships. • But without walls, you don’t have the security to

build ships.The Earl and Edna Stice Lecture February 7, 2014

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Introduction

Why is poverty and under-development so persistent?

Many theories: Bad Policies Capital Education Good governance Incumbent risk

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Introduction

We argue: The real problem is the violence trap.

We build on 2 ideas (1) Violence is endemic

▪ Median number of years between violent regime change is 8 years.

▪ NWW’s thesis that all countries must solve the problem of violence.

(2) Episodic shocks

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Introduction

Theory: Distributed violence

The Natural State: The natural solution to violence. Rent-creation. Proportionality principle Implies:

▪ Limited access, ▪ Lack of impersonality, ▪ Lack of perpetuity

Violence trap Absence of property rights, rule of law Threat of violence Adds risk to investment

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Introduction

Proceed as follows Data on endemic violence Elements of the developing country

environment Theory:

▪ Statics: How natural states mitigate violence ▪ Dynamics: Shocks

Violence trap Conclusions

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Endemic Violence

Percentile Poorest Half Richest Quartile (With Richest

Decile Removed)

Richest Decile

50 7 12.5 60

Study Regime Duration:Leadership succession without violence.

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Endemic Violence

Poor Countries: Median poor country faces:

▪ Violent regime succession every 7 years. Only 5% of developing countries”

▪ Experience 50 years of peaceful succession. Whereas 50% of the developed countries

▪ Experience 60 years without violence. Most developing countries regularly face

violence. Richest developing countries more like poor

ones than the developed countries.

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Developing Country Environment

Focus on two features of the developing country environment (1) Distributed violence potential

▪ Mexico ▪ Military in many societies

▪ Argentina, Brazil, Chile ▪ Thailand▪ South Korea, 1950s-80s.

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Developing Country Environment

(2) Shocks▪ Swings in commodity prices▪ Differential growth▪ Technological or demographic change▪ Discovery of minerals

Examples▪ Marcos’s Philippines ▪ Putin in Russia ▪ Mid-20th century Lebanon

Main point: ▪ Shocks change the distribution of violence potential /

balance of power.

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How Developing Countries Mitigate Violence

Tactics to reduce violence NWW (2009), Violence and Social Orders Rent-creation.

▪ Local monopoly on beer, cement, a mill; telephones.▪ Protection from competition ▪ Substantial subsidies and privileges to one firm

▪ Air India Key Insight:

▪ Make individuals and groups with violence potential better off cooperating than fighting.

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How Developing Countries Mitigate Violence

Main implication: The proportionality principle: rents and

privileges must be in rough proportion to military power:

Each player’s rents must exceed their expected value of fighting.

Failing to do so means the group with more power than rents prefers to fight for more.

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How Developing Countries Mitigate Violence

Implications (1) Bargaining failure results in violence (2) States must limit access

▪ Protect rents and privileges ▪ Suppress organizations – political, economic, and social▪ Many natural states: all significant organizations have

direct ties to the ruler:▪ Mubarak’s Egypt▪ Suharto’s Indonesia, ▪ Hussein’s Iraq▪ Nazi Germany

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How Developing Countries Mitigate Violence

Personal exchange Natural states lack:

▪ Impersonal property rights, ▪ Rule of law.▪ Many public goods

Direct methods of solving violence fail Unilateral disarmament Economic integration

Four natural state features: Rent-creation: the proportionality principle Limited access Personal rather than impersonal exchange Shocks: new violence.

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How Developing Countries Mitigate Violence

An important lesson: Economists see “market intervention” and

“directly unproductive profit-seeking” This perspective obscures the logic of the

natural state.▪ The problem is not rent-seeking but violence.

In the face of distributed violence potential, rents are productive.

Nonetheless, solving the problem of violence through rents and limited access keeps most natural states poor.

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Bargaining and Shocks

Common developing country pattern Years of peace punctuated by violence.

Income per capita, 2000 ($)

Positive Years of growth (%)

Average Positive Growth Rate (%)

Average Negative Growth Rate (%)

< 20,000 66 5.4 -4.9

>20,000 (no oil) 84 3.9 -2.3

Source: NWW, table 1.2

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Bargaining and Shocks

Query: If a bargain satisfies proportionality principle, why violence? Dynamics: episodic shocks, shift bargaining power

▪ Regime survival requires adaptation “Asymmetric information”

▪ “I think I’m stronger than you think I am” Failure to adapt to changing circumstances Limited access:

▪ Fewer ideas generated; ▪ Lack of competition => harder to get rid of bad ideas.▪ Arab spring

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Bargaining and Shocks

Main implications: Big shocks require renegotiation to satisfy the

proportionality principle. Asymmetric information & commitment

problems plague renegotiation. Natural states therefore frequently fail to

adapt to changing circumstances. Experience violence instead.

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The Violence Trap I

Consider a new leader’s choices (following violence). (1) Maintain natural state (2) Reform:

▪ Remove policies creating rents▪ Relax limits on access▪ Foster impersonal commitments

▪ Property rights▪ Rule of law

▪ Economic integration▪ Disarmament

Problem with reform: Relaxing these constraints

▪ Threatens to violate the proportionality principle ▪ Thus makes violence more likely.

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The Violence Trap I

Violence trap implies that the natural state is stable. Distributed violence potential Lacks impersonality (property rights, rule of

law) Lacks economic integration

At best, most natural state develop slowly. Many don’t develop at all.

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Adam Smith on the Violence trap

Smith’s central concern in the WN is economic development.

Yet Smith is confusing: He offers 3 different sets of insights into development:

▪ Division of labor (Bks I&II)▪ Bad policies – e.g., Mercantilism (Bks IV&V)▪ The violence trap (Bk III)

Smith in WN book III Thesis about the transition from feudalism to

commercial economy ▪ Explains the no-growth feudal equilibrium qua violence trap ▪ How towns escape the violence trap

Easy to miss (most economists ignore BK III)

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Feudalism as a Violence Trap

Feudal equilibrium The King:

▪ The chief great lord.▪ But not much more powerful than the barons.▪ Cannot provide security or protect rights.

Local lords captured most of the local surplus▪ Omnipresent violence required lords to convert surplus into security ▪ Via local military organization

Most people lived at subsistence. “Neither the kings nor the great lords could prevent violence.

In those disorderly times, every great landlord was a sort of petty prince. His tenants were his subjects. He was their judge.... He made war according to his own discretion, frequently against his neighbors, and sometimes against his sovereign.” [WN]

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Feudalism as a Violence Trap

Little investment: “men in this defenceless state naturally content

themselves with their necessary subsistence; because to acquire more might only tempt the injustice of their oppressors.” [WN]

This world was poor, violent, and undeveloped. European-wide expansion of trade. Potential gains to coastal towns from

Trade, Investment Specialization and exchange.

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Transition from Feudalism toThe Commercial Economy

But endemic predation: "The wealth which they did manage to

accumulate under such unfavorable conditions was subject to the arbitrary exactions of both the king and those lords on whose territories they might happen to be based on through which they might pass." [WN]

Thus, the violence trap (Thucydides) CNW terms

Bargaining failure due to ▪ Many shocks ▪ Problems of asymmetric information and commitment

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Transition from Feudalism toThe Commercial Economy

Smith: the next step is political exchange King and Town ally against the great lords. New possibilities arose for the defense of towns

against the lords. In exchange for fixed taxes, the king granted

the towns:▪ Political freedom ▪ Self-governance and the right to make laws, collect

taxes, ▪ Build walls.

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Transition from Feudalism toThe Commercial Economy

Political exchange created three simultaneous revolutions:▪ Liberty▪ Commerce ▪ Security.

“Order and good government, and along with them the liberty and security of individuals, were, in this manner, established in cities at a time when the occupiers of land in the country were exposed to every sort of violence.” [WN]

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Transition from Feudalism toThe Commercial Economy

Towns extended their reach into the countryside “Commerce and manufactures gradually introduced order

and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors.” [WN]

Military advantage over local lords. Bring property rights, security and investment

into the countryside.▪ Countryside transformed from poor self-sufficient

agriculture into specialists participating in markets.

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Transition from Feudalism toThe Commercial Economy

Greater specialization and exchange/ division of labor implies economic growth. Security transforms local lords and their retainers Towns also grow due to long-distance trade.

Greater surplus allows towns to extend reach even further.

Positive feedback loop. Towns grow. Extend their reach further. Greater

division of labor, more growth. Repeat.

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Transition from Feudalism toThe Commercial Economy

Smith makes clear the non-incremental nature of the political exchange between king and town: “By granting them magistrates of their own, the privilege of

making bye-laws for their own government, that of building walls for their own defence, and that of reducing all their inhabitants under a sort of military discipline, he gave them all the means of security and independency of the barons...”

“Without the establishment of some regular government…, without some authority to compel their inhabitants to act according to some certain plan or system, no voluntary league of mutual defence could either have afforded them any permanent security, or have enabled them to give the king any considerable support.” [WN]

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Transition from Feudalism toThe Commercial Economy

In CNW terms Feudal equilibrium = natural state

▪ Distributed violence▪ Violence trap

Shock: possibilities for trade Non-incremental response:

King and towns create a whole new corporate entity with very different properties from the rest of the country.

Towns escape the violence trap via increasing returns.▪ Walls, security allow greater investment, specialization and

exchange.▪ Allows trade and provides growth▪ Towns further extend their reach, generating more growth.

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Conclusions

International donor agencies World Bank IMF European Bank for Economic Development

All have standard economic incremental reform model. They ignore:

▪ The problem of violence ▪ The logic of natural states.

Their approach to reform has failed for 30 years.

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Conclusions

The problems of development are much harder to solve than economists realize Natural states are stable

Adam Smith points a different way.

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Conclusions

Problem of donors: Market reform Democracy Too little attention to issue of liberty,

commerce, security

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