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GURU already offers descriptions of a wide range of books on economics recommended by NES professors. We decided to extend our “library” with two reading lists compiled by our readers. The authors from the first list can be split literally into two camps, and this is how we have arranged them in our review. The second list is here.
How did the state originate and what does it exist for? The answer that Douglass North and his co-authors give to this question is in the very title of their book – states arose and developed as a tool to control violence and ensure order. No society has succeeded in eliminating violence, they argue: “at best it can be contained and managed.” The way society does this determines to a large extent its structure.
There are two types of social order in the modern world (the first one was the primitive order of hunters and gatherers):
"Systematic rent-creation through limited access in a natural state is not simply a method of lining the pockets of the dominant coalition; it is the essential means of controlling violence. <...> Personal relationships, who one is and who one knows, form the basis for social organization and constitute the arena for individual interaction, particularly personal relationships among powerful individuals. <...> In the open access orders that emerged in the second social revolution, personal relations still matter, but impersonal categories of individuals, often called citizens, interact over wide areas of social behavior with no need to be cognizant of the individual identity of their partners. <...> In the legal terms that came to characterize impersonal organizations in the Western tradition, these are perpetually lived organizations: organizations whose existence is independent of the lives of their members."
Economically, open access societies outperform natural states thanks to their stability: their growth periods are comparable, but the recessions in the limited access orders are deeper and last longer than in free countries. “Although evidence from the past few decades is mixed, over the past two centuries political and economic development appear to have gone hand in hand,” the authors write.
The open access pattern is characterized by:
The limited access pattern is characterized by:
Open access orders are more stable not only because they are more economically developed, but also because the personal relationships prevailing among the elites in a natural state are not constant. For example, external shocks, leaders’ mistakes, the strengthening of new groups of influence and the weakening of old ones can destabilize the situation. “If particular violence specialists grow stronger relative to the others, for example, they are likely to demand a larger share of privileges and rents," the authors argue.
The main question is how natural states turn into open access ones. The transition, according to North, Wallis and Weingast, occurs not because the elite makes concessions and is ready to share power and rent, but because the struggle between different groups within the elite forces it to expand the rights of an increasing part of the population. Simply put, elites seek to protect themselves by creating impersonal institutions, rather than controlled by their potential opponents.
Three conditions are important for the transition:
Historically, the transition happens quite quickly and usually takes about 50 years. As examples, the authors mention the United Kingdom, France, the United States, Spain, and write about the experience of South Korea and Taiwan.
Are there universal ways for the transformation of societies? North, Wallis and Weingast say there are none. Every society evolves in unique ways, so that a deep understanding of change must go beyond broad generalizations to a specific understanding of the cultural heritage of that particular society. The paths and policies that created open access in the Western world cannot be indiscriminately applied to foster the transition among today’s limited access orders. “The world constantly changes, and our ideas about how societies function are constantly being made obsolete by new developments and changes. The world we are creating today is like no other that has ever existed. Can we prepare ourselves to comprehend and deal with it?" North, Wallis and Weingast ask.
The book by a recipient of the Nobel Memorial Prize in Economic Sciences, Joseph Stiglitz, for all the sharpness of his judgments and the radicality of the proposed methods for fighting inequality, is extremely relevant and to some extent continues the discussion of the issues raised by North and his co-authors. Stiglitz himself calls his work a book on the politics of efficiency and justice. He believes that the US economic system has proved to be a failure for most Americans, and explains why inequality is growing so fast and what it leads to. “America is no longer a land of opportunity,” he states.
Politicians give inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor. Using power, the elites get for themselves tax cuts, protect their businesses from competition, create monopolies, in other words, pump out rent from the economy. The injustice of such a system is half the trouble, but it is also ineffective, Stiglitz argues: the economy is less stable and grows less, and rent-oriented behavior is destructive, because its followers earn less than they take from others.
The top tried to promote the idea that discussions about inequality are just discussions about redistribution – taking from someones and giving to others… However, this is not the case, Stiglitz says. Part of the problem in the US is that too many at the top are unwilling to contribute to public goods, which is absolutely necessary if society and economy are developing normally. While we are discussing the word “justice”, those at the very top paying a smaller percentage of their income in taxes than those who are not so well-off, our tax system is not fair – and is widely perceived not to be fair.
The middle class is being washed away, inequality has turned into a self-perpetuating system, which leads to an increasing gap between the richest 1 percent and the rest of the US population, Stiglitz notes. The rising inequality is proven by the increase in the Gini coefficient for the United States: it declined before 1980, and then climbed up, going from 34.7 to 39.8 in 2021, according to the World Bank. “Those in the 1 percent are walking off with the riches, but in doing so they have provided nothing but anxiety and insecurity to the 99 percent. The majority of Americans have simply not been benefiting from the country’s growth,” Stiglitz says, warning that the unequal distribution of wealth and opportunities threatens the very principles of democracy and social stability.
“Real democracy is more than the right to vote once every two or four years. The choices have to be meaningful. The politicians have to listen to the voices of the citizens. But increasingly, and especially in the United States, it seems that the political system is more akin to “one dollar one vote” than to “one person one vote.” Rather than correcting the market’s failures, the political system was reinforcing them.”
A significant part of the book is devoted to dispelling the myth of the dominant importance of the interests of the richest 1 percent. The old myth of the need to glorify the wealth of those at the top – for the sake of universal benefit – has been used to justify keeping capital gains taxes low. But most of the capital gains come not from job creation, but from speculation, Stiglitz argues.
A free market is good for society, he admits, but on one condition: if it is competitive. Therefore, the government needs to regulate the market. Otherwise, the minority will use the levers of power to profit at the expense of the majority.
“The power of markets is enormous, but they have no inherent moral character. We have to decide how to manage them. At their best, markets have played a central role in the stunning increases in productivity and standards of living in the past two hundred years <...>. But government has also played a major role in these advances, a fact that free-market advocates typically fail to acknowledge. On the other hand, markets can also concentrate wealth, pass environmental costs on to society, and abuse workers and consumers. For all these reasons, it is plain that markets must be tamed and tempered to make sure they work to the benefit of most citizens.”
This book is also about the problems coming from the modern economic system. “What is capitalism? One of humanity’s greatest inventions, and the greatest source of prosperity the world has ever seen? A menace on the verge of destroying the planet and destabilizing society? Or some combination that needs to be reimagined?” – Harvard professor Rebecca Henderson asks. To answer these questions, she analyzes three great problems of our time that are becoming more important day by day: massive destruction of the environment, economic inequality and the collapse of institutions.
Henderson raises some of the same issues as Stiglitz. Under the current form of capitalism, wealth and the right to use natural resources have ended up in the hands of a small share of people, while the majority suffer from a relatively low standard of living, Henderson argues. The alternative to a strong, democratically controlled government is not the triumph of the free market, but “the alternative is crony capitalism, or what the development economists call “extraction,” a political system in which the rich and the powerful get together to run the state – and the market – for their own benefit. Extractive elites monopolize economic activity and systematically underinvest (when they invest at all) in public goods such as roads, hospitals, and schools,” the scholar says.
The profit maximization business is limited. Henderson calls the belief that the sole responsibility of the firm is to maximize ‘shareholder value’, the main problem. She quotes Nobel laureate Milton Friedman, who believed that “the social responsibility of business is to increase its profits.” “From here it’s not far to the idea that focusing on the long term or the public good is not only immoral and possibly illegal but also (and most critically) decidedly infeasible,” Henderson states.
“When we told the leaders of firms that their sole duty was to focus on shareholder value, we gave them permission to turn their backs on the health of the institutions that have historically balanced concentrated economic power. We told them that so long as they increased profits, it was their moral duty to pull down the institutions that constrained them—to lobby against consumer protection, to distort climate science, to break unions, and to pour money into efforts to roll back taxes and regulations. We pushed businesspeople into alliance with populist movements that actively campaigned against government, and that rejected fundamental democratic values. In the short term these alliances yielded seductive returns, but in the long term they threaten the fundamental pillars of our societies and our economies.”
Henderson is mainly interested in the social dimension of the economic system. She believes that excessive focus on economic freedom leads to the destruction of the environment and society, to the steady degradation of institutions that keep the market balanced. As an illustration, she describes Russia after the collapse of the USSR: the country zealously undertook to introduce a completely free market, Henderson says, but “no one stopped to price externalities, build the institutions that would enforce the rule of law, provide decent education and health care, or ensure that firms couldn’t set their own rules. Behind the smiles, the men with guns were still in charge. The Russian state sold its holdings – the vast majority of the economy – to a small group of cronies, creating a particularly nasty form of crony capitalism.”
Henderson, like Stiglitz, offers solutions to deal with the existing shortcomings and create “capitalism with a human face.” She does this using the example of various startups and corporations focused on caring for the environment and the well-being of employees. The scholar names five elements of human-centered capitalism: the presence of shared values, the search for meaning, the reconfiguration of finance, intra-industry cooperation, as well as the restructuring of institutions and the revision of the role of the state.
Henderson is deeply convinced that changes in the structure of society itself, as well as at the individual level, in the long term will allow entrepreneurs to flourish, and society to strive for social justice and genuine democracy.
Next, we move to a book with opposite ideas. It is the work of Milton Friedman, one of the most influential economists of the second half of the 20th century and the author of the theory of monetarism, whose views were argued by Henderson. He wrote Free to Choose together with his wife based on the TV series and his famous book Capitalism and Freedom. It has 10 chapters (about the market, schools, consumer protection, crises, etc.) in which Friedman analyzes the economy and society through the prism of freedom of choice in individual and public life.
Friedman argues that the freedom of choice is the key element in achieving wealth and happiness. He is confident that free markets and free people together can create the most harmonious and prosperous society. Particularly interesting are the chapters about the Great Depression that was the subject of a famous research by Friedman and Anna Schwartz, A Monetary History of the United States.
Friedman is a prominent advocate of minimal government intervention (the laissez-faire theory), believing that it can lead to restrictions on freedom and, as a result, to a decrease in efficiency and living standards. He suggests replacing government regulation with a system based on market mechanisms: “Physical and human characteristics limit the alternatives available to us. But none prevents us, if we will, from building a society that relies primarily on voluntary cooperation to organize both economic and other activity, a society that preserves and expands human freedom, that keeps government in its place, keeping it our servant and not letting it become our master."
This book is another manifesto proclaiming the power of capitalism, the free market and the idea of individualism. It makes no sense to retell a work of fiction, but it is worth mentioning that Ayn Rand, who calls for reducing regulatory pressure on the economy, has had a strong influence on some economists and politicians. For example, former Fed Chairman Alan Greenspan was a member of her group "The Collective". Milton Friedman wrote that Rand is “an utterly intolerant and dogmatic person who did a great deal of good.”
