10 - The state in Neoinstitutional Economics

Summary

Introduction

In Chapter 9, we examined the system of property rights in stateless societies, particularly how informal rules, values, and taboos constrain behavior and limit the waste associated with open access to resources. However, the embryonic institutional structure of prestate societies is not capable of supporting the complex exchange relationships among unrelated individuals that are associated with highly developed specialization in production and large markets, advanced technology, and time-intensive production patterns.

Without the state, its institutions, and supportive framework of property rights, high transaction costs will paralyze complex production systems, and specific investments involving long-term exchange relationships will not be forthcoming. But the state is a two-edged sword: “The existence of a state is essential for economic growth; the state, however, is the source of man-made decline.”

Section 10.2 elaborates North's (1979) theory of the state, which was introduced in Chapter 3. His approach is based on the modern theory of the firm (see Chapters 5 and 6) and emphasizes how transaction costs and agency problems affect political behavior and the structure of property rights. We present a formal version of a North-type model of the state (due to Findlay and Wilson), and consider various ramifications of the approach.

Section 10.3 is given to empirical applications of the theory. Our purpose is primarily to outline critical variables and suggest a research agenda rather than to settle debates in economic history and development.