LECTURE ONE

1
LECTURE ONE

• Stationary Bandits

2
Emergence of States

• Roving bandits
• Insecurity, short time horizon
• Impact on investment
• Criminal metaphor
• Crime reduces output, criminal is affected 1/n
• Control over territory, mafia is affected fully
• Protection, control crime, optimize over time
• Chinese warlord
• Regular plunder, keep other bandits away
• Peasants security, increased output, all gain
• Autocracy
• Second invisible hand, own interest, not
  altruism
• Provide collective goods, optimize over time

3
The Role of Time

• High performance
• Get much wrong and still grow
• Forced mobilization
• Production possibilities
• Sustainable growth, good institutions
• Exploit all options for gain (constructive)
• Temptations for government
• Confiscate, devalue, default
• Promises sufficient?
• Time consistency
• Decisions to invest today, state reverses policy
  tomorrow
• Binding promises, constitutional commitment

4
End of Autocracy

• Stationary bandits
• Market-augmenting government, high growth
• Kleptocracy, graveyard spiral
• Decision point, security of tenure
• Glorious revolutions
• England 1688-89, USA 1776
• Negotiated contracts, all gain
• Slow spread, institutional imitation?
• Collective action
• Rule of law a collective good
• Respect for the law an internalized norm
• Both evolve, cannot be implanted
• Why England and Holland?

5
Role of Cities

• Dual function (Russia an exception)
• Market place
• Security, fortification
• Development factor
• Market for surrounding countryside
• Stimulus for surplus production, trade
• Charters
• Stadtluft macht frei, rights and privileges
• Horizontal trading and credit relations
• Surrounding vertical feudal society
• Basis for Western society
• Third World
• Megacities, massive influx, trading, informal
  sector
• Extension of institutions, remain outside

6
Coasean Bargains

• Problem of social cost
• External effects, government intervention
• Pigou, welfare economics
• Zero transaction costs, recontracting
• All bargains will be executed (Pareto)
• High transaction costs
• Incomplete recontracting
• Big Bills Left on the Sidewalk
• Russian privatization
• Initial distribution of property rights
  immaterial
• Recontracting secures effective owners
• Reality faulted the theory

7
Law Enforcement

• Rule of law
• Cultural not technical
• Prisoners dilemma, break the rule
• Individual vs. collective rationality
• Why do actors not violate property rights?
• Market-contrary policies
• Mutually beneficial transactions (narcotics, sex)
• Government prohibits, who reports offenses
• Erosion of the rule of law, government
  illegitimate
• Illegitimate rules
• Incentive to evade or break the rule
• Increasing burden on enforcement, reduced risk of
  detection
• Weak enforcement, erodes norms, vicious spiral

8
State vs. Private

• Protection of property
• Individual households, locks, vigilance
• Private sector, security, insurance
• Absent private property
• Common property is no property
• Who suffers if I steal?
• Who wins from protecting?
• Legitimacy of state property
• Who does not steal from the state
• Employ agents of the state
• Employ agents to supervise the agents
• Mass looting

9
Rights-intensive Production

• Distribution of transactions
• Spot markets
• Hierarchies
• Contracts
• Performance
• High performance, contract intensive
• Demand for institutions, long term
• Implications
• Rule of law, role of the state
• Demand for human capital
• Civil society, democracy