Governmental Forms and Economic Development

The world has developed from primitive conditions to present day income levels. The chapter sketches two different approaches to explain development. Fukuyama and others adopted a biological evolutionary approach while others contend that development depends on men made institutions. The two views collide on the role of the state in economic development. A strong state bureaucracy should organize development in one view, while the other puts enterprise and market competition central. Post Mao China figures as a successful example of authoritarian transition, but many autocracies in past and present were stagnant or experienced decline. Biological evolution makes the fittest survive and dominate others. But, Darwinian competition impedes development, if the fittest do not recognize some others as equal. Development depends on voluntary acts of recognition of human potential. A central plan based on blue-prints of an ideal society did not turn out as expected.

Development is not obvious. Many political and economic thinkers did not see much improvement in their life-times. Machiavelli lamented the decline of Florence and other Italian city-states. Alexis De Tocqueville described how eighth century France succumbed to revolutionary forces. French philosophes had paved the way for rational autocracy that eliminated other views. French economists gave the state a central role in engineering development. US and English Enlightenment differed from its French counterpart. Schumpeter sketched how capitalist economies developed through cycles of prosperity and depression caused by innovation. Capitalist development came to a halt in the Great Depression. Democratic discourse stopped in countries where infallible leaders seized power and took control of the economy; rights were violated. Frank Knight and Peter Drucker wanted to explain the descent into totalitarianism they experienced in the 1930s Keynes wanted to curb depression by fiscal and monetary policies. Developed economies went through several recessions after 1945. Economic theory has not yet put innovation and uncertainty central, which prompted central banks to adopt unconventional economic policies in the financial crisis of 2008.

Weber argued that authority can only be absolute; contracts and agreement cannot evoke desired behavior. He lamented occidental feudalism as a weak form of authority that was based on contract and not on command. Cities arose in the Low Countries, when counts and lower lords granted rights to cities to govern themselves. Issuing rights benefitted both lords and cities. Italian communes united in the Lombard League freed themselves from imperial control, but became engaged in endless factious fights that allowed condottieri to take control of cities. Italy fell into decline, when autocracy replaced communal government. The Low Countries prospered in the late middle ages, when cities expanded in both numbers and wealth. The Empire provided an institutional framework that prevented inter-city wars. The nobility shrank in numbers, but increased in power, when entry to the nobility was closed. A culture of chivalry regulated behavior of a noble caste that was mainly interested in warfare. Citizens lived by their own rules and engaged in trade and crafts. Courts and councils were installed to solve conflicts without taking recourse to arms in the Low Countries.

The provinces of the Low Countries were part of the Holy Roman Empire. Conflicts between vassals were regulated in knightly behavioral codes. Limited wars erupted at times of succession, when groups of nobles supported their candidate lord. These fights could be solved within the feudal code, if they did not spring from treason. The southern province of Brabant installed councils to solve conflict through negotiation. Centralization proceeded, when a lack of heirs, warfare and financial distress brought provinces in one hand. Charles V united the 17 provinces and installed central institutions to govern the Low Countries. However, centralization was disrupted by the Reformation. Religion ignited revolt that led to the Dutch War of independence from Habsburg Spain. Geuzen armies operated as war bands that sowed terror in Holland. Willem of Orange and his army disbanded the Geuzen, when the seven provinces declared themselves independent. Several attempts to negotiate peace had faltered at that time due to Calvinist zeal and Spanish militancy. Southern provinces remained with Habsburg rule, while the Northern provinces continued the fight.

The new Dutch republic hovered between restoring feudal institutions or installing absolute sovereignty. The provincial States took authority upon themselves after separating from Spain. But, the delegation model proved unsuited to cope with the exigencies of (foreign) policy. A fight for power emanated between stadhouder and raadspensionaris. Absolute rule prevailed, when the stadhouder representing the nobility took the authority of raadspensionaris upon himself. The Dutch case differed from England where Long Parliament was restored after the civil wars. Dutch vigor disappeared, when repeated purges diminished elite ranks and installed a corrupt parasitic regime. The republic’s military role was played out after 1672 and leadership moved to the English. Religious dissidents had moved to the republic, but the Pilgrim Fathers took sail, when they did not obtain civil rights. Cities declined, when a small landed elite appropriated surpluses. Discourse ended, when deviant views were punished. The republic fell into Napoleon’s hands without much opposition. But, French ruled did not restore rights. Absolute monarchy was installed after Napoleon’s defeat. Constitutional monarchy was only established in 1848, when a new constitution came into effect.

The role of the state in development has divided social scientists. Some argue that a strong state suffices, while others have put man made institutions central. History shows that granting rights to people and organizations spurred growth. Development does not result from a central plan carried out by state bureaucracy, but from competition among plural organizations. Market competition requires institutions that organize discourse. Financial markets close in times of war and revolution. Feudal organization and discourse has inspired management thinkers to develop models for modern organizations. Drucker wanted to liberate workers from oppressive bosses by letting markets decide on performance. His models have found widespread acceptance, although many organizations still cling to hierarchy. But, markets need to be complemented with judgment of people and projects. Organizations like Semco and Google have developed organization models that combine markets and individual judgments. These companies demonstrate that development depends foremost on the ability of organizations to turn competition into a positive force that enhances the value of human capital.