A theory of institutions
8.1. Sources of political power
Who has political power and where does it come from? As we noted in the Introduction (Section 1.2, point 4), political power comes from two sources.
First, an individual or group can be allocated de jure power by political institutions. But institutions are not the only source of power. A second type of political power accrues to individuals or groups if they can solve the collective action problem, create riots, revolts, or demonstrations, own guns, etc. We call this type of power de facto political power [see Acemoglu and Robinson(2003, Chapter 5)].Actual political power is the composition, the joint outcome, of de jure and de facto power. To see how this works out in practice, consider the situation in Chile in the early 1970's. SalvadorAllendewas elected President with a plurality of the popular vote. The formal political institutions of democracy in Chile allocated power to him to propose legislation, issue decrees, etc. Consequently, even though he did not have an absolute majority in congress, Allende had a great deal of de jure political power. Political power is not just de jure however; it does not simply stem from political institutions. Allende, despite being empowered under the Chilean Constitution, was overthrown by a military coup in 1973. Here, the military under the leadership of General Pinochet, were able to use brute force and guns to over-ride the formal political institutions. The ability to use force is one example of de facto political power.
As we suggested in the introduction, the relationship between political power and economic and political institutions is complex and dynamic. Consider the example we discussed in Section 7.2, the research by Haber on the comparative financial evolution of Mexico and the United States in the nineteenth century. Haber traced the different evolution of economic institutions to differences in initial political institutions.
These political institutions led to different distributions of power and this was critical for the emergence of good financial institutions in the United States, whereby those who benefited from a competitive banking industry were able to force politicians to provide the rules which would guarantee it. But where did these differences in political institutions come from? These differences were partly a result of political events in the nineteenth century, and partially a result of different colonial political institutions. In the United States, during the initial phase of colonization in the early seventeenth century very low population density and lack of easily exploitable resources forced colonizing companies and the British state to make both economic and political concessions; they granted the settlers access to land and accepted the formation of representative democratic institutions [Morgan (1975)]. Consequently, even at independence the United States had relatively democratic political institutions [Keyssar (2000)]. Moreover, the initial egalitarian distribution of assets and the high degree of social mobility made for a situation where, at least in the northern states, the distribution of economic resources, and thus de facto power, was relatively equal. The relatively representative political institutions therefore persisted and were supported by the balance of de facto power in society.In Mexico there were very different initial conditions during the colonial period with a large indigenous population and rich silver mines to exploit. This led to a much more hierarchical and authoritarian balance of political power and very different colonial economic institutions [see Engerman and Sokoloff (1997)]. These conditions fed into the different institutional structures at independence, the United States with its constitution, checks and balances and federalism, Mexico with its much more centralized, unchecked, unbalanced and absolutist state. These different political institutions then led to very different economic institutions and economic outcomes after independence.
Thus, in some ultimate sense, the source of different political institutions were different initial conditions during the colonial period.Consider now the evidence presented by Bates. Agricultural policies were better in Kenya because large farmers could solve the collective action problem and exercise de facto political power. But the main reason for the existence of large farms was that British settlers expropriated the land from Africans during the expansion of colonialism [see Berman and Lonsdale (1992)]. Thus previous combinations of formal political institutions (colonial institutions) and de facto power (the military might of the British Empire) determined economic institutions, feeding into the future distribution of de facto power even after the nature of de jure power changed dramatically with independence.
We can now see that these examples substantiate the dynamic model that we sketched in Section 1.2. There we showed that at any date, political power is shaped by political institutions, which determine de jure power, and the inherited distribution of resources, which affect the balance of de facto power. Political power then determines economic institutions and economic performance. It also influences the future evolution of political power and prosperity. Economic institutions determine the distribution of resources at that point, which, in turn, influences the distribution of de facto power in the future. Similarly, the distribution of power at any point determines not just the economic institutions then, but also the future political institutions. Thus the allocation of political power at one date, because of the way it influences the distribution of resources and future political institutions, has a crucial effect on the future allocation of both de facto and de jure political power.
Both the comparison Haber made between Mexico and the United States, and that which Bates made between Ghana, Zambia, Kenya and Colombia illustrate this diagram in action.
They show how political institutions and de facto power combine to generate different set of economic institutions, how these institutions determine both the distribution of resources and the growth rate of the economy, and how power and institutions evolve over time, often in ways that tend to reinforce particular initial conditions.8.2. Political power and political institutions
The examples we discussed above showed how political power depends on political institutions and de facto power, and how this determines economic institutions. Moreover, we saw that at any time the pre-existing economic institutions will be an important determinant of the distribution of de facto power. The final element to emphasize is how political institutions evolve over time and how they influence the distribution of political power.
To see why political institutions are so important as a source of political power think of a situation where a group, say the Chilean army in the early 1970s, has a great deal of de facto power. Indeed, it has so much de facto power that it can overrule the Chilean Constitution, making the political institutions largely irrelevant. In fact in Chile the de facto power of the military was able to overthrow the legitimate government and completely reverse the economic policies and economic institutions chosen by the Allende government (including land reform and mass nationalization of industry). Not only did the military reverse the economic institutions preferred by Allende and the groups who elected him, they then implemented their own preferred set of economic institutions, in particularly deregulating the trade regime and the economy. Yet the Pinochet regime was heavily concerned with political institutions, and in 1980 Pinochet re-wrote the constitution.
If de facto power was decisive in Chile what is the role for political institutions? If the constitution can be overthrown, why bother to re-write it? The secret to this lies in the intrinsically transitory nature of de facto power.[268] Yes, the military were able to organize a coup in 1973 but this was only because times were uniquely propitious.
There was a world-wide economic crisis, and factions of the military that opposed the coup could be marginalized. Moreover, the United States government at the time was happy to encourage and endorse the overthrow of a socialist government, even if it had been democratically elected. The coming together of such circumstances could not be expected to happen continually, hence once Chilean society re-democratized, as it did after 1990, the military would not be able to continually threaten a coup. In response to this Pinochet changed the political institutions in order to attempt to lock in the power of the military, and thus the economic institutions that he/they preferred. Therefore, the important role for political institutions is that they influence the future allocation of political power. This dynamic role is crucial because it explains the major desire of agents to change political institutions when they get the chance - this is how they can attempt to enduringly alter the balance of political power in their favor [see Acemoglu and Robinson (2003)].8.3. A theory of political institutions
We now have in place the outlines of our theory of institutions. There are seven points to emphasize, paralleling the discussion in Section 1.2 and our diagrammatic exposition there. First, individuals have preferences over economic institutions because of the allocation of resources that these institutions induce.
Second, people’s preferences typically do not agree because efficiency and distribution cannot be separated. Different economic institutions will benefit different groups, and this will determine the preferences of these individuals and groups with respect to economic institutions.
Third, the problem of commitment explains why efficiency and distribution are inseparable. Economic institutions are collective choices, and they are chosen and sustained by the state. Since there is no third party to enforce the decisions of the state, problems of commitment are particularly severe in the political realm.
Fourth, the equilibrium structure of economic institutions will therefore be determined by who has the power to get their way, i.e., who can create and sustain economic institutions that benefit themselves. The distribution of political power thus determines economic institutions, the allocation of resources and the rate of economic growth.
Fifth, political power has two forms: de jure power determined by the political institutions, such as the constitution and the electoral rules, and de facto power, which stems from the ability to solve the collective action problem, mobilize weapons, etc. De facto power can influence political outcomes independently of the political institutions, and its distribution often critically determines how a given set of institutions works in practice and whether or not they are actually obeyed.
Sixth, the distribution of de facto political power at any date is influenced to a large degree by the distribution of resources in society, since those with greater resources can command more power both through legitimate and intimate means, and perhaps can also solve the collective action problem more efficiently. Naturally, the distribution of resources at this point is influenced by economic institutions and economic outcomes in the past.
Finally, political institutions are also endogenous; the current balance of political power, incorporating both de jure and de facto elements, also determines future political institutions. Political institutions are important because they allocate, at least within the limits defined by the exercise of future de facto power, the allocation of future de jure political power. Since de facto power, because of the nature of the collective action problem, is intrinsically transitory and difficult to wield, political institutions are often crucial in creating a source of durable political power. This makes it very attractive for groups to use their de facto political power to change political institutions so as to modify the distribution of future political power in their favor.
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