Democracy, Social Change, and Economies in Transition
States emerged as distinctive sorts of organizations some 10,000 years ago. Before then, victorious violence and organized power certainly existed, but did not crystallize in states; they did not congeal, that is, into coercion-wielding organizations, separate from kinship structures, that exercised priority in some regards over all other organizations within delimited territories. Economies, on the other hand, have belonged to social life since the beginning of human time, at least in the sense that groups of humans created social relations by means of which they allocated scarce resources. From the invention of states onward, state agents have strongly influenced economic processes by extracting resources, making war, creating administrative structures, and—in greatly varying degrees and forms—intervening in exchanges and commitments among people falling under their jurisdictions. Thus for a hundred centuries humans have created, experienced, debated, analyzed, and prescribed relations between states and economies.
Normative and prescriptive ideas shadow almost all discussions of states and economic transition. In our own time, social democrats prefer states that intervene in economic activity sufficiently to ensure some minimum of justice and welfare; capitalist liberals want just enough state—and just the right kind—to guarantee property, enforce contracts, and tune public finances in a way that supports economic growth, while libertarians and anarchists call for little or no state at all. Of course each of these normative-prescriptive positions rests on non-normative theories concerning the likely causes and consequences of state action in its various guises. But each causal account also clings to a set of preferences.
The analyst's job is to open some distance between one and the other, at least to the extent of examining under what conditions, if any, trajectories of change from existing to desirable situations could actually occur. Success in that distancing will mitigate the effects of teleological reasoning, the special form of built-in preference that analyzes change in terms of approaches to, or failures to approach, some target condition such as a full market economy and/ or extensive democracy. Even when applied to processes in which human agents are seeking well-defined goals, teleological reasoning hinders explanation. It does so because:
Human interaction always entails limited information, bounded rationality, error, unanticipated consequences, and constrained error correction, all of which produce discrepancies between outcomes and consciously articulated ends.
Multiple paths away from a given social situation are almost always possible.
Hence explanation entails showing what chains of causes selected for one of those paths and against the others.
One way to create analytical distance between causal processes and desired outcomes is to think of human history since states emerged as a huge set of natural experiments in connections between states and economies. Many sorts of state and many kinds of economic organization have flourished somewhere in the world over that long period, but in retrospect most historians of the two claim to find dramatic covariation between them—autocratic empires typically coinciding with landlord-dominated but peasant-based agrarian economies, urbanized trading economies typically supporting thinner oligarchic states, and so on. At a minimum, these natural experiments give us the means of thinking critically about two issues raised by any discussion of states and economies in transition: (1) static interdependencies between state structures and forms of economy, and (2) dynamic relationships between changes on the two sides.
Fiscal strategies illustrate both the static and the dynamic interdependencies. Three decades ago, Gabriel Ardant (following leads provided centuries earlier by Niccolò Machiavelli and Jean Bodin; see, e.g., Ardant, 1965) insisted that fiscal policies tied all sorts of states to their ambient economies. Ardant was an economist and socialist who long served as a high fiscal officer of the French state, but acquired the leisure to reflect and write when Charles de Gaulle came to power and detached him from his administrative duties without being able to force his resignation. Free to travel widely and advise foreign governments on fiscal affairs, he noted wide variation in the effects of ostensibly superior fiscal practices from country to country—or, more precisely, from economy to economy.
Ardant called particular attention to the relation between an economy's commercialization and the efficiency of different fiscal policies. With commercial activity sparse and major trade flows well channeled, for example, customs, excise, and other taxes that can be collected at relatively few monitoring points tend to bring in larger returns for a given effort than do wealth and income taxes. Only with extensive labor markets, wage labor, and governmental monitoring of employing units do income taxes ordinarily yield enough revenue to make the extensive and continuous record keeping and surveillance they entail worthwhile.
Ardant also pointed to the reciprocal relationship: state fiscal strategies affect ambient economies by giving their participants incentives and opportunities to hide assets, move capital, shift from one sort of production to another, and create flows that bypass monitoring points. Moreover, they frequently involve state agents in promoting those activities that support their own crucial enterprises—for example the production of rice in a Tokugawa Japan whose governments depended heavily on taxes in kind. Thus for Ardant the effectiveness of a fiscal program depended not on its conformity to some abstract ideal, but on its fit with the particular economy from which state agents were extracting resources.
As Ardant pointed out, state interventions in economies look quite different from the top down and the bottom up. From the top, we see agents of a state engaged in a set of extractive, coordinating, and controlling activities. Those activities result from some combination of demands (1) from within the state for conditions and resources that will permit operation of state enterprises, such as the military, and (2) from powerful constituents outside the state who borrow state power in pursuit of their own interests. From the bottom, we see people and organizations operating within the state's ambit who react to state agents as regulators, monitors, exploiters, and/or allies. Ardant wrote a dramatic account of tax evasion and rebellions incited by taxation, for example, as responses to manifestly unjust and grossly inefficient fiscal regimes. Only an interactive account that represents both top-down and bottom-up views will provide a means of describing and explaining state-economy relations.
We can generalize the sort of reasoning adopted by Ardant. Across Europe as a whole over the last millennium, varying intersections of organized capital with organized coercion have yielded very different sorts of states and economies. Taking variations in state structure as the object of explanation, we can define a range from (1) regions of sparse capital and abundant coercive means to (3) regions featuring extensive concentrations of capital along with great fragmentation of coercive means, passing by (2) a midpoint of relative equality in concentrations of capital and coercion.
In the first sort of region, typified by Poland over most of its last thousand years, state formation followed a coercion-intensive path. At the other ex-
treme, typified by much of the Low Countries, capital-intensive state formation prevailed. Around the midpoint, where England and France operated through much of the millennium, capitalized coercion characterized the transformations of states. In the long run, military superiority gave the forms of state that developed in capitalized-coercion regions an evolutionary advantage. Before the decisive nineteenth-century expansion of relatively bureaucratic, well-capitalized, and coercion-subordinating states, however, coercion-intensive states long survived in the guise of tribute-taking, warrior-landlord-dominated empires that preyed upon the capitalists who came into their grasp. At the capital-intensive end of the range, likewise, city-states, city-empires, and trading federations thrived for centuries before capitulating to their military rivals.
Each of these alternative state-formation processes had a somewhat different impact on economic activity within its territory: first because each type of state intervened distinctively within its surrounding economy, and second because each fortified a different set of economic actors. Under the first heading, states' searches for resources to maintain their own activities held overwhelming predominance until the nineteenth-century. Coercion-intensive states tended to employ levies in kind rather than cash; to allocate monetary taxes as a function of political vulnerability rather than wealth or income; to seize conspicuous unprotected wealth militarily; and to place the collection of revenues in the hands (or fists) of relatively autonomous regional or cultural magnates, thus pushing economic activity toward a division between coerced production of basic goods and quick-return investment in activities generating mobile and easily concealed assets. Capital-intensive states tended to favor cash levies; to draw revenue from excise taxes and customs; and to purchase military means on national or international markets, thus promoting the further commercialization of their economies.
Under the second heading—differential favors to economic actors—we might characterize the coercion-intensive varieties as landlords' states, the capital-intensive varieties as merchants' states. The contrast sets a landlord-dominated Russia against a merchant-dominated Venice. That comparison, to be sure, simplifies brutally: in Russia, for example, tsars from Ivan the Terrible onward subjugated autonomous nobles to imperial power and created a relatively effective imperial bureaucracy, while in Venice an oligarchy of merchant families set strong limits on the activities of their lesser confreres. Nevertheless, a patent difference appears between the forwarding of landlord interests in coercion-intensive Russia and the promotion of mercantile activity in capital-intensive Venice.
Although many theories of state-economy relations give ultimate priority to economic organization, then, no sensible account can neglect the mutual dependence of state and economy. In economies featuring extensive markets for raw materials, producers' goods, consumer goods, capital, and labor, agents
of states intervene incessantly not only by means of fiscal policy, military procurement and expenditure, monetary controls, infrastructural investment, and other obviously economic activities, but also by establishing, operating, and altering institutions that govern relations among economic actors. Douglass North and his collaborators have made compelling cases for the fundamental influence of such institutional arrangements on levels and distributions of economic activity (see, e.g., North 1985, 1991).
Whatever else they do, states always serve as instruments of exploitation. I mean exploitation in the classic sense of the word: actors who control valuable resources enlist the effort of other actors in producing goods by means of those resources, but award those effort-expending actors less than the net value their effort adds to aggregate production. States serve exploitation in two different ways—through direct production of goods and through intervention in the production of goods under control of their favored collaborators. Through most of their history, states have directly produced military goods for the benefit of their rulers; sometimes produced fiscal goods, such as monopoly salt or tobacco, to sell for state revenues; but otherwise concentrated on assisting exploitation by their ruling classes.
Capitalist states have continued that pattern, canting their assistance toward owners of capital. Socialist states, on the other hand, have broken the pattern by placing major producing organizations under direct state control—often in the name of the people at large or at least of the working people, but with the actual effect that officeholders have become the chief exploiters. Officeholders in socialist states—and, for that matter, in nonsocialist states as well—become exploiters to the precise extent that they divert production by means of collectively held resources from collective goods to their own private benefit.
Democratic arrangements, whether coupled with relatively socialist or relatively capitalist states, redirect and mitigate exploitation in two ways: first by greatly enlarging the circle of exploiters (which at an ideal extreme becomes coextensive with the citizenry), and second by committing organized effort to the production of collective goods. A regime is democratic, as I understand it, to the extent that its institutions deliver (1) broad citizenship; (2) equal citizenship; (3) binding consultation of citizens with respect to state policies and personnel; and (4) protection of citizens, especially members of minorities, against arbitrary action by agents of the state.
Such a definition strikes a middle ground between formal criteria stressing elections, parliaments, and related institutions, on the one hand, and substantive criteria stressing equity, commitment, and well-being on the other. Even if (1) deep economic inequality and autonomous militaries threaten democratic institutions thus defined; (2) contested elections, parliaments, and independent judiciaries tend to promote binding consultation of citizens, as well as their protection from arbitrary state action; and (3) democratic polities thus defined favor equity, commitment, and well-being—all of which seem
likely—it serves explanation better to exclude these elements from definitions of democracy.
Democratic regimes concentrate their benefits on citizens. True, in many Western states legal residents actually qualify as near-citizens; within the European Union (EU), for example, differences in rights between citizens and ostensible foreigners from elsewhere in the EU are diminishing. Similarly, Latin American states maintaining major migration streams to the United States are increasingly granting dual citizenship to their emigrants who acquire U.S. citizenship. After a century or so during which Western states insisted on sharp distinctions between citizens and foreigners, the line is now blurring. As analysts, we can accommodate such facts either by expanding the definition of ''citizen" or by substituting for "citizen" in our definitions of democracy something like "persons who live continuously under the jurisdiction of the same state." Either approach draws attention to a crucial fact about states: all of them actually impose multiple degrees of citizenship, if only by excluding minors, prisoners, and certified incompetents from full exercise of citizens' rights. To that degree, all polities fall short of full democracy.
The Task Force on Economies in Transition has divided its efforts between two complementary pursuits:
First, identifying ways of describing and explaining economies in transition (especially economies emerging from state socialism) that differ from teleological accounts built on the assumption that extensions of private property and market relations ipso facto promote effective capitalist economies.
Second, specifying the place of political institutions, including democracy, in economic change.
We have been willing to assume that post-communist economies will integrate more extensively into the circuits of world capitalism than did their Warsaw Pact predecessors, but not that they will become replicas of existing capitalist economies. We have argued that both institutional legacies of state socialism and continuing involvement of state actors in economic change must significantly affect how closer integration into the capitalist world occurs, and with what effects.
With respect to states and democracy, our inquiry has therefore concentrated on the following sorts of questions:
How do the existing world economic organization and the legacies of state socialism constrain likely paths of economic change in post-communist economies as compared with previous entries into the capitalist world economy?
To what extent do those constraints explain the phenomena rulers, critics, and academic analysts of post-communist economics have commonly labeled as failure, resistance, corruption, and distortion?
How, why, and with what consequences are changes taking place in the political institutions that significantly affect economic activity—property
rights, patronage, and influence networks, as well as formal organizations and constitutions?
What future changes are likely in these areas, and why?
To what degree, and in what ways, do the answers to the above questions explain recent changes in property rights, production, household economic behavior, and welfare policies? What implications do they have for future policies in these areas and their likely effects?
Available answers to these questions lie on a continuum from liberal to institutional. A strictly liberal account argues that free-market economies, wherever and whenever they form, greatly resemble each other, dissolve impediments to their operation left by previous regimes, and transform social structure in similar inexorable ways. It follows that (1) existing capitalist economies provide likely models for the futures of economies now experiencing expansion of market activity, (2) future trajectories from nonmarket to market economies will resemble those by which existing capitalist economies arrived at their present organizations, (3) interventions to hasten such changes can reasonably consist of constructing institutions now characteristic of advanced capitalism, and (4) observers can measure the success of such interventions by the rapidity with which market-mediated transactions increase.
A strictly institutional account, in contrast, argues that previously existing social organization and culture strongly constrain all economic change, and that the economic arrangements of market capitalism depend on a particular and historically exceptional set of institutions, so that there can be no replications of previous capitalist economies and transitions to them. It follows that (1) existing capitalist economies provide misleading models of futures for nonmarket economies now experiencing expansion of market activity; (2) the paths of such economies to more extensive markets will differ both among those economies and between them and existing economies; and (3) effective interventions to hasten market expansion will require close analysis of existing social structure, extensive revamping of underlying nonmarket institutions, and continuous monitoring of nonmarket effects with an eye to feedback that will transform the conditions and likely consequences of intervention.
The above discussion, of course, draws cartoons to dramatize contrasts between extreme positions. All the chapters in this volume fall somewhere between these extremes. Nevertheless, the implied continuum from one extreme to another helps identify significant differences among our authors. For example, Polishchuk's essay on "missed markets" criticizes Russian reformers for assuming an extreme version of the liberal scenario. He identifies incomplete democratic institutions as obstacles to economic advance. Yet Polishchuk himself ends up endorsing a relatively liberal position: that if reformers would stimulate the formation of factor markets, other markets would develop in a fairly orderly fashion. Leitzel's analysis of Soviet and post-Soviet rule evasion, in contrast, takes a strongly institutional line, stress-
ing how the carryover of practices and social relations from the previous regime promotes forms of privatization that offer great profits to a few individuals while diverting capital from productive long-term investments. Without drastic institutional reorganization, his analysis implies, Russia will follow a distinctive and dangerous path toward bandit capitalism.
In general, the more institutional a position taken by our authors, the more they consider existing state organization to constrain economic change and the less they suppose that expansion of markets will generally promote growth-enhancing governmental arrangements. On the relation between capitalism and democracy, however, arguments array differently along the continuum. At a liberal extreme, extensive capitalist markets more or less automatically dissolve authoritarian polities and move them toward democracy. Midway across the continuum, causality reverses, with analysts giving priority to democratic institutions; absent some minimum of equality and breadth of citizenship, plus binding consultation and protection of citizens, runs the argument, capitalist economic relations will not work. But at an institutional extreme, each regime changes so differently from others that—whatever the direction of causality—no general functional interdependence exists between capitalism and democracy. At that extreme, analysts tend to explain the rough empirical correspondence between capitalism and democracy in the contemporary world as a consequence either of joint diffusion from the West or of differential incorporation into a capitalist core.
Although theorists of democracy, capitalism, and economic growth commonly take strong positions on how each of these processes covaries with and affects the others, no consensus has emerged among students of these subjects. Even within this one section of our volume, opinions run from Åslund, who, while conceding that a "strong civil society" promotes economic growth, generally treats democracy as an outgrowth of capitalism, to Walder, who implies that China is experiencing rapid economic growth and extensive alteration of state structures without moving at all decisively toward democracy. Åslund's position approaches the liberal end of our continuum, Walder's the institutional end. In between stands Przeworski, who argues forcefully that certain sorts of democratic state institutions—but only certain sorts—provide essential underpinnings for capitalist economic growth. The debate continues.
Ardant, A. 1965 Théorie Sociologique de L'lmpôt. 2nd vol. Paris: SEVPEN.
North, D. 1985 Transaction costs in history. Journal of European Economic History 14:557-576.
1991 Institutions. Journal of Economic Perspectives 5:97-112.