Commitment, Coercion, and Markets

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Commitment, Coercion, and Markets

• Avner Greif
• Stanford
• Chapter 28 in the Handbook on New Institutional
  Economics.
• 2005.
• Edited by Claude Menard and Mary M. Shirley.

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Two Interrelated Questions

• Why do we observe distinct trajectories of market
  development?
• Why did the modern market emerge when and where
  it did?
• Why not China or the Islamic world?

• Why do we observe distinct trajectories of
  political developments?
• Particularly of political representation of
  economic agents.

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The conjecture

• Both developments are function of Coercion
  Constraining Institutions (CCIs).
• Institutions that determine the acquisition and
  use of coercive power on the social level.

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The Dynamic of Market Expansion

• Market integration versus market expansion.
• Extent of the market depends on its contract
  enforcement institutions (CEIs)
• The fundamental (commitment) problem of exchange.
  
• Markets expand when additional CEIs enable
  commitment by more people in more situations.

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Types of Contract Enforcement Institutions (CEIs)

• Organic, spontaneous private-order
• Family, community, networks,
• Pragmatic, designed CEIs
• Public-order based on the state. Laws and
  regulations.
• Private-order stock exchange, chain stores,
  credit card, (Will ignore here.)
• Hybrid. (Will ignore here.)

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• The premise
• The more CEIs can be used by the economic agents,
  the more the market can expand.
  (Complementarities versus substitutability.)
• The question
• Why different CEIs had been developed in
  different economies?
• Why did the institutional foundations of the
  modern market emerged in the West?

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The analysis

• Supply
• The ability to effectively provide public order
  CEIs.
• A function of CCIs.
• Demand
• For public order CEIs.
• A function of organic CEIs.

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Can the state supply public-order institutions
effectively?

• Collective action, coordination,
• Effectively?
• The existence of, and reliance on public-order
  facilitates wealth confiscation by the a state
  using its coercive power.
• Without security from abuse of property rights,
  public-order CEIs will be underutilized.

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• The question of market expansion directly relates
  to a broader question
• The institutions limiting the use of coercive
  power by the state (or its agents) to abuse
  property rights.
• A problem of commitment / deterrence.
• Whether solved depends on the CCIs.

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Coercion-constraining institutions

• The (social level) institutions that influence
  decisions regarding the acquisition and use of
  coercive power.
• Effective CCIs
• Those with coercive power either do not abuse or
  protect property rights.
• They either can commit or are deterred.

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Two basic types of CCIs

• Balancing coercive powers.
• Neither an endowment nor necessarily a monopoly.
  (Stergios.)
• Balancing coercive power with economic power.
• Power does not necessarily imply the ability to
  economically benefit from it. (Ernesto)

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Balance of coercive powers

• A society without a ruler.
• Mutual deterrence among social units clans,
  tribes, villages, communes,
• E.g., Genoa under the Consulate.
• Cost of abuse conflicts, retaliations, losing
  gains from cooperation.

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Balance of coercive powers (2)

• A ruler with a coercive power that is not
  provided by the economic agents
• E.g., the First Muslim Empire, the Ottoman
  Empire, Imperial China.
• Lower cost of abuse. (Higher cost of respecting.)
• A ruler whose coercive power is provided by the
  economic agents
• A coordinating ruler.
• E.g., the European feudal system, Venice.
• Higher cost of abuse.

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Effectively supplying public-order CEIs

• Least A ruler with a coercive power not provided
  by the economic agents. .
• Better Mutual deterrence.
• Best a coordinating ruler.
• Coercive power is provided by the economic
  agents. (Other equilibria may exist.)

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Balancing coercive power with economic power 1th
Mechanism

• The economic agents can sanction a ruler
  following an abuse.
• Takes advantage of occupational and geographical
  mobility, etc.
• E.g., the Merchants Guild. (Chapter 4 based on
  Greif, Milgrom, Weingast. JPE. 1994.)

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Balancing coercive with economic power 2th
Mechanism

• Second mechanism the structure and control of
  the states administrative structure.
• Administrative capacity and its controls
  influences the cost and benefit of various
  abuses.
• Knowledge, information, capacity to capture,
  ability to transform confiscated wealth to
  elements in rulers payoffs.

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Administrative structures and deterring abuses

• Absent state
• E.g., Imperial China.
• Low benefit from abuses.
• Delegation of services by the state.
• E.g., Financiers/ legal system under the Ancient
  Regime (France).
• High cost of abusing the delegates.

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Administrative structures and deterrence

• Self-governance/autonomy of the economic agents
  
• They provide services valuable to the state (like
  delegation).
• In addition constitute a state within a state.
• Legal, Administrative, Economic organization.
• E.g., the Medieval Communes. (Also military.)
• High cost and low benefit from abusing.

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Sum CCIs and effectively supplying public-order
CEIs

• Coercive power
• Ruler with power.
• No ruler.
• Coordinating ruler.
• Armed commercial sector.

• Economic power
• Absent state.
• Delegation.
• Self-governance.
• By commercial sector.

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Relations between CCIs and political development

• The puzzle of granting political representation
  Costly to the ruler.
• They facilitate coordination of action against
  the ruler, transmission of information,
  legitimate actions, etc.
• An effective CCIs is an equilibrium.
• Each side would not unilaterally take actions
  that will be considered a deviation.
• E.g., raising taxation, increasing the army,
  establishing a state-wide court,

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Yet, such actions may be in the interest of both
parties

• Providing public goods (security in face of an
  external threat, enforcement), etc..
• If binding budget constraint, the ruler will ask
  for permission.
• The interest of the economic agents is
• To allow for Pareto optimal changes that maintain
  balance of power.

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Political institutions as a function of the CCIs

• If there are effective CCEs, there is a need for
  coordination Representative Bodies.
• Only those whose power constrain the ruler get
  political voice.

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The irony,

• Representative organizations also facilitate
  abuse of property rights.
• E.g., England after the Glorious Revolution.
• Ireland, colonies, the enclosure.

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So far, supply side.

• What influence the demand for public order
  institutions?
• Economic and technological factors
• Size
• Economic diversity
• Etc.

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Demand side organic, private-order institutions

• Different organic institutions create different
  demand for public-order CEIs
• Collectivism/segregation low demand.
• Individualism/integration high demand.
• Chapter 9 based on Greif JPE 1994. Cultural
  Beliefs and the Organization of Society.

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Conclusion

• Co-determination of market expansion and
  political development
• as a function of CCIs and organic CEIs.

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E.g.,

• CCIs absent state (no budget constraint).
• Organic CEI
• Collectivism / segregation
• Implications - stagnation
• No market expansion (market based on organic
  CEIs).
• No political development.

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• CCIs
• Rulers constrained by the coercive and economic
  power of the commercial sector budget
  constraint.
• Organic CEIs
• Individualism / integration
• Implications development
• Of markets and the polity.
• Public-order CEIs and political representation.

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• History?
• China - stagnation
• Late medieval Europe - development

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China CCIs limiting supply of CEIs

• A market economy with an absolute ruler.
• Absent state from the commercial sector.
• thin administration (1,300), no commercial legal
  code, no commercial taxation to 19th century.
• No political representation. No budget
  constraint.
• No political evolution.

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China organic CEIs limiting demand

• Lineage based society.
• Communalism and segregation.
• Network of normative social relations.
• Low demand for public-order CEIs.

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Market and political development in late-medieval
Europe,

• Coercion-constraining institutions conducive to
  effectively supplying public-order institutions.

• Individualism, private-order institutions created
  demand for public-order institutions.

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CCIs favoring supply of public-order CEIs in LM
Europe

• The collapse of the Roman Empire
• The collapse of the Empire of Charlemagne.
• Bottom-up state formation with
• Coordinating rulers and self-governances.

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Organic CEIs favoring demand for public-order
CEIs

• Western Individualism (beliefs and social
  structures) in the past and present.
• Reflected in literature, contractual society,
  family names, confession,
• Origin and mechanisms Ancient world/ Church,
  imbedded in institutions.

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Late medieval co-evolution of markets and polities

• The late medieval commercial expansion.
• The rise of representative organizations and
  limited monarchies throughout Europe.
• Legal development.
• A process in which public-order CEIs, markets,
  and political institutions co-evolved.

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Why different outcomes in various parts of Europe?

• Similar initial developments
• Italy, France, Spain, Flanders.
• The Military Revolution (15th-16th)
• A major factor.
• Implications depended on initial conditions and
  historical contingencies.
• Poland

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England, a success story?

• Communal autonomy constrained coercion and
  enabled institutions providing local public
  order.
• The implied wealth, organization and coercive
  ability furthered their potential coercive power
  and hence political influence.
• This enables exposing more wealth to the state
  without fearing abuse.

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Manifestation?

• The Community Responsibility System.
• Late 13th transition to a public-order
  institution provided by the state.
• At the same time, the Parliaments of 1265 and
  1295 (the Model Parliament).
• Taxation
• Militia
• Edward I, the Law Giver
• The Glories Revolution Commercial sector gain
  the power to set the policy.

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France

• Initially Feudalism, autonomy, representative
  institutions.
• Standing army, taxation centralization of
  coercive power, private delegation by the king,
  and growth of public administration.
• Tying the Kings Hands. (Hilton, Hoffman).

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Over time, particularly during the 19th century,

• Inter-European political and economic
  competition.
• The rise of the Commercial Sector.
• Ideological development associated with the new
  political and economic system.
• Building on the LM heritage E.g., France.

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From the past

• To the future