Transcript for:
Lecture by Professor Douglas North

good afternoon everybody my name is Keshawn maboob ani I'm the Dean of the Lee Kuan Yew School of Public Policy it gives me great pleasure to welcome you to this public lecture by Professor Douglas north now before anything else can I if you don't mind actually requests and after I insist that you either switch off your cell phones or put them on the silent mode I say that because it's becoming a rather bad habit in Singapore to have cell phones ringing in the middle of a lecture and it is rather distracting so I would really encourage you to search it off now you those of you who have heard me make introductions before know that I always begin by saying that I follow the advice of my guru professor Tommy Coe and I make three points today for the first time I'm going to discard Tommy cause three points because I think three points will do great injustice to our speaker who's truly a remarkable I would call him a true renaissance man and I want to go into some detail into his life story if only because it goes against the entire Singapore model of how you are supposed to succeed in life you know in the Singapore model you must get into the right primary school the right Secondary School go to the right University get a get scholarships and all that and guess what when you and I read to you the story of Professor Douglas north you'll find that he would not succeed in Singapore let me begin by lacerating how colorful his life history was a young boy he lived a nomadic life he actually was born in Cambridge Massachusetts where as you know where Harvard is but because of his father's business here the opportunity to live and study in different parts of the United States Europe and Canada now as he says in his own autobiography both his parents did not complete their high school education but both believed in the value of good education and when he was young professor Douglas North had desire that his mission in life was to be a photographer and so he won as a high school student the first fourth and seventh prizes in an international competition for college and high school students and when he came to college he actually was offered a place in Harvard but being very handsome apollyon he chose to go to the University of California in Berkeley to be close to his family and according to his autobiography this is from yours and recorder his record at the University of california-san undergrad it was only slightly better than the C average although he did have a triple major in political science philosophy and economics now in between his academics he also became a Marxist and actively participated in liberal student activities and because he was a pacifist he chose not to fight in World War two and instead he joined the Merchant Marine and when he joined the Marine much in Marina I learned that as soon as he got on bought the first ship going from San Francisco to Australia the captain said to him we have no navigator can you navigate the ship and of course he did in the beginning of World War two and then he sailed back and froth himself from San Francisco to Australia and in the front lines in New Guinea in the Solomon Islands now during the three years that he was a navigator in World War two he spent his time reading and concluded then that he wanted to become an economist and while on bought the ship he also mastered a very important skill which is now encouraged in Singapore where he also mastered the game of poker winning a total of $2,500 which as you know was a huge sum in those days now he claims that he won the games not because of strategy but because of discipline his opponents were drunk and intoxicated and he was sober whenever there was an area he was the only one sober enough to collect the money then he bought a ranch of these winnings now after the war he went back to University of California Berkeley Graduate School and this time he was clear what he wanted to do he decided no no more photography he decided to improve societies worldwide it was clear to him that the way to do this was to find out what made you cannot be what made economies work the way that they did or failed to work he failed he believed that once we had an understanding of what determined the performance of economies through time we could then improve their performance and till today he remains committed to the idea of how do we improve societies and I hope you'll get a glimpse of that in his lecture too now in graduate school as he says his worldviews were shaped by highly influential professors however he admits that he did not quite understand and understand I quite understand formal economic theory as he learned them through rote learning but it was from his friend with whom he played chess they he learned the reason like an economist which is according to him from the most important school skills he had acquired indeed throughout his long career here apply economic reasoning not only to questions of economic growth but overtime to historical and sociological issues such as the role of culture how politics affects economics and how economics affects politics a defining moment in his career came in 1956 which is exactly fifty-two years ago when he was invited as a research fellow of the u.s. National Bureau of Economic Research NBER where he met leading economists NBER is the United States leading economic research organization 16 of the 31 American Nobel Prize winners in economics and six of the past chairman of the US President's Council of Economic Advisers have been researchers at the NBER subsequently professor North became a member of the board directors of NBER where he became very influential in shaping the field of economic history he also became convinced and that the tools of neoclassical economic theory were not after a task of explaining the kind of fundamental societal change that I characterize European from medieval times onwards and he was in this long search for new analytical tools that he became interested in subject of new institutional economics in 1993 he won the Nobel Prize in Economics along with Bob for girl for revitalizing the field of economic history and for his work in new institutional economics now more important fact for you all to know is that in the past 20 years he has also been asked to nominate candidates for the Nobel Prize in Economics and he has got his nominations right hundred percent in fact one of his nominees professor Tom shelling won the Nobel Prize in Economics in 2005 those of you on apply please apply to him for nomination interestingly and and and he may not be fully aware of this professor North has also played an important intellectual role in shaping the agenda of schools of public policy that is to put the subject of good governance into the curriculum and research agenda of schools of public policy indeed worldwide efforts to define and measure good governance tres is intellectual roots the new institutional economics of which Doug professor North is an acknowledged leader now he often uses a sports analogy to distinguish within institutions governance organizations and public policy as a useful way to differentiate these concepts and make them meaningful now sports analogies are supposed to make things simple and easy for you to understand right now I'm going to read the next four lines and if you don't understand don't worry in order to die when I first read it now this is the sports analogy uses he says for instance he says that institutions are the formal and informal rules of the game including their enforcement mechanisms that's institutions organizations are the players of the game including those who make interpret and enforce rules governance is how the game is played and public policies are the outcome of the game now that's very simple and clear right well that actually gives you a remarkable example of the complexities of the ideas that Professor North has dealt with and from what from a school of public policy his ability to bring together all the different strands in one comprehensive theory is a great gift I should also add here that Professor North's advice and political and economic reform is frequently sought after around the world he has advice governments in Latin America transition economies in Europe and in China and indeed the world the world development report in 2002 was dedicated the subject of building institutions for market and professor north was quoted high in the report his forthcoming book actually is a subject of our little lecture today it is an important contribution he will be an important contribution to the field of political economy and I hope as he will elaborate today economics and public policy are intricately linked to politics and if I see was and indeed you know in our school of public policy we would like to see greater interconnectedness within the studies in economics politics law and other areas and that's what he emphasizes to now the final point on a meg about him is that he is still a very young man at 87 years old he professor North is still going strong he says that his secrets those successes good wine every lunch or dinner now I saw this on Monday when after a brilliant seminar I gave an institute of policy studies professor Tommy Cole took him out for lunch or Japanese restaurant and he said I don't need Japanese food without sake so he drank a whole bottle of sake and then went on his way to meet the minerals minister mentor Lee Kuan Yew after that he also has a good sense of humor a loving wife Elizabeth case was here who's also a strong intellectual partner and a very strong sense of mission to improve societies I'm pleased to report that the Lee Kuan Yew School of Public Policy shares many of these characteristics we love good wine we hope we have a sense of humor and we certainly have a mission to inspire leaders and improve lives and I hope all this will come true when professor not address us today professor north over to you I don't think I need to say anything after that introduction he's covered at all including almost all the intellectual ideas I've got but that was a lovely introduction thank you what I'm going to talk about is what we don't understand we don't understand something that is so obvious and so clearly necessary that it's very peculiar in fact we spent more than 150 billion dollars trying to get economic development around the world and so far without a great deal of success now that's a puzzle and it's a puzzle because we know the sources of what makes economies rich it's very straightforward you get rich if you become more productive so you put more produce more output per man-hour per time and that essentially is a backbone and heart of what is economic development we also know the institutions and my friend here to give you a definition of institution so I don't have to say anything more about them but I'm going to because we know that it requires that you have well-defined property rights effective judicial system things like that not some things we know all all know now if we know the sources of economic growth and the way and the kind of institutional structure that is necessary to get it what's missing we don't know how to get it economics political science sociology and you're gonna hear all three from me our static disciplines that explore very narrowly their own particular field what you're going to get from me is a mixture of all of them because I think that you can't understand how a society works unless you understand that all three of them were involved in trying to make sense out of our world and even though you may understand that the theory we have is static that is it's a theory it's good economic theory is a powerful body of theory but it explores how an economy works at a moment of time it also assumes away all of the interesting things that were concerned to try to understand all of which I'm going to talk about in a minute now what's missing well first of all beliefs second of all time third of all culture and fourth of all institutions and I'm going to take each one in turn beliefs how do we understand the world around us now what economics inherited was from the physical sciences physics and chemistry and so on and they have very elegant bodies of theory in which get at fundamentals of what either genes or neurons or whatever and whenever they run into a new problem they go back to fundamentals and then they build a build from that a theory about trying to deal and solve that problem that's been very powerful powerful enough so we could fly to the moon and do all kinds of things as a basis of a body of theory that solves our problems we don't have any such fundamentals in the social sciences what we have is eyes ears nose and feeling and those are the only ways we understand the external world that's all we understand but how do we translate what I see or hear or feel into understanding the complex structure of human interaction that characterizes our world well it happens in our brain so the beginning of understanding is to ask ourselves how does the brain take these things that come from the senses and translate it into a coherent explanation that allows us to understand who we are where we are what we're doing what other people are doing now if you think that's simple you're wrong we don't still know a great deal about cognitive science we don't still know a great deal but the way in which the brain takes what you see or what you hear and inside your brain builds it into a structure to make sense out of the world around us why is that important well that's important because we have different experiences in different parts of the world with different times and those different experiences mean that the other way we understand the world is not going to be the same for me as for you as for you as for you it's going to be different and indeed that difference is at the heart of almost all the problems in the world if we all had the same experiences we translate presumably the world the same way and we'd have a common understanding of the world but whether we're Americans Muslim fundamentalists or whatever we've all had different experiences and we translate it differently so the beginning of being intelligent about how societies and economies and polities work is to understand that the beliefs that people have our result of the way in which the brain is constructed and translated the senses into a particular structure and order okay and that it's going to be different which takes me to the next thing it's not only going to be different at a moment of time it's going to change over time because the world we see today and the world we saw yesterday are different and very different than the world of a hundred years ago or two hundred years ago or five hundred years ago so not only is culture something I'm going to come to come to admit not only as culture gonna differ with different experiences we have when differences in different environments but it's going to change over time and what we mean by culture what we mean by culture is the beliefs and institutions that we've inherited from the past that structure human interaction today let me say that again because it's the heart of everything I'm gonna say culture is the beliefs and institutions that haven't been inherited from the past that constrained the choice set economic technical jargon constrain the choice set in the present of people now why is that important well that's because you don't you don't really have free will you never did what you've got is a world in which you're so constrained by the beliefs and the rules of the game so on that you've got inherited from the past that how you understand the world is not only different in different environments but it's going to change over time now all of that's crucial because if we're going to understand the world we better understand that this is the source of the kinds of differences that make the conflicts that we see all the time that make for the fact that we don't understand people in different environments and that the world we see is continually changing and we're trying to understand that change as a dynamic process that's going on all the time the way we translate it those experience is institutions institutions are the way we structure human interaction now if we didn't have institutions we wouldn't know how to deal with each other instead institutions define a structure that determines how I deal with my wife or any of you why I'm up here translating and talking the way I am institutions as my introducer made clear is made up of formal rules informal norms of behavior and enforcement characteristics formal rules are straightforward there are in in most liberal sense their property rights but there are also any kinds of rules that are enacted by government and usually by government all all come to qualify that in a minute that define the way in which overall the game is played informal norms are ways of doing things values and so on that constrained the way in which we interact with each other and in many respects are more important than the formal rules after all when I deal with my students or deal with other faculty members or with anybody else it's the way we deal with each other is neatly defined by all kinds of conventions codes of conduct that define how we deal with each and most important of all if you have institutions but they're not enforced they don't have much they don't make much difference and all all institutions are always imperfectly enforced let me give you an illustration of what I'm talking about I'm going to apply it to professional team sports you play football here all of what you call football and what we call football the United States are different but you can translate it easily enough football is made up of formal rules that define the way the game is supposed to be played informal norms such as you're not supposed to break the quarterbacks leg of the opposing team or translated into soccer which is your football you're not supposed to trip up the other guy and kick him in the shins and things like that and enforcement which is you have referees umpires and so on whose objective it is to see that the rules are enforced but I don't know about you probably here in in Singapore you're all very gentlemanly and ladylike and therefore live by the rules but in professional football in the United States the Oakland Raiders won the World Championships year after year by deliberately beep breaking the quarterbacks leg on the opposing team because he was the key player and if you did him in why you'd win you say what a horrible thing but that's the way all societies work all societies work on the basis of institutions and very imperfect enforcement now why am I going at this so long well because the way societies work and that's what we're interested in the way societies work is a function of way institutions work and while they we try to make them work in a certain way they never work ideally or perfectly that way they work very imperfectly so even the most effective institutional structure one that produces the Western world very high-income world still has all kinds of defects and failures and so on now one more introductory comment and then I'm gonna get to the crucial framework that I want to deal with and that is violence one of the things that distinguishes human beings from lots of other animals but in which we have a close relationship with chimpanzees but not bonobos I might add and that is we kill each other with great abandon we've been doing it ever since the beginning of time and because we are violent with each other creating social order creating a society that will work and provide a context within which human beings can interact can deal peacefully and effectively each other has been an ongoing continual dilemma of societies all through history so violence is always a threat and social order and peace and stability are very delicate if you doubt me and I suggest you look at what happened to Iraq in the last ten years the United States wiped out a dictator in Iraq and didn't replace him with anything at least not with anything that worked wiped out there's whatever you can say about that sattim Hussein he did create order he did create a system in which within that order y-you had political economic social activity going on and once that got wiped out it's not easy to replace okay so now we're ready to talk about what I think is the fundamentals of each of the way in which societies have organized themselves all through history there's just and what I and my two colleagues were writing this book called social orders that is they're just three fundamental ways throughout history that human beings have organized themselves and when I say organize themselves I mean produced institutional frameworks that structure the way the game is played very in a very ineffective very ineffectively or at least sometimes ineffectively the three social orders are primitive societies which are only of historical interest which is hunting and gathering societies the natural state or the limited access society and open access society now I'm not going to talk about the first but I'm going to talk a lot about the natural state or limited access societies and I'm gonna talk a lot a little bit about open access society note that the way in which I'm approaching the problem is very different than as an economic historian I was taught economic history or as even I wrote economic history in earlier days economic history and indeed societal change has usually been talked about or written about in terms of technological change the growth in the stock of knowledge or a demographic change such Malthusian pressures and fertility mortality migration and there's no doubt these are very crucial basic parts what determines the way in which societies work and they provide an underground under underpinning frame of the way in which I think societies work but what I focus on is on the way in which we structure social order and the effectiveness of doing that and most crucial of all the incentive structure that comes out of the way in which we structure social orders and it's the incentive structure that determines the performance characteristics of societies because what's missing in lots of societies is that it does not pay for players to be more productive to be creative to do the kinds of things that we know makes for productivity increase and makes for human wellbeing so what we're looking at therefore is why we have societies in which the incentive structure of the social order is one that provides only limited or very poor incentives for people to be more productive so let me talk about the natural state or the limited access society it has dominated human history ever since the Agricultural the Neolithic Revolution which produced agriculture beginning in 8000 BC in Mesopotamia because that was the beginning of human being settling down it was the beginning of producing organized economic activity of specialization division of labor the classic framework within which atomic economics is built and that framework was one not therefore led to he completely changed fundamentally changing the potential well-being of human beings and that social order is still dominates most of the world today maybe 80 to 85 percent of the world still lives in a natural state now what made the natural state so powerful what made it such an effective system was that it produced elites political economic religious social elites that had a stake in preventing violence by cooperating with each other in such a way that they stood to gain by that cooperation and not fighting with each other now let me give you a simple illustration if you had a economic group the elites in that economic group would provide support for the political group that ran the society and that political group in turn would limit competition in that thing so that the economic group would capture rents and indeed the preservation of limited access and that's what you mean by limited access was we're worlds in which the players stood to become rich or influential by the fact that they captured rents and while it was cooperation I mean who was competition the competition was limited and effectively limited so that the elite groups stood to gain by preserving the rents of each other now that's still the way most of the world is run it's still the way most societies operate it's a world in which elite groups survive and maintain social order in their self-interest by preserving by creating rents that are maintained and it's a world in which personal exchange that is knowing the other person is a key part of the way the game is played now the natural state or limited access societies dominate the world for all this time but they're very different in terms of how well I work and indeed we can define natural states in terms of a progression of actual States from very fragile ones to stable structures to mature natural States and what defines the difference between first early part of the latter part is that fragile natural states are always in danger of violence the the elites are always threatened by other elites with different interests and to preserve therefore and survive they must must maintain themselves by creating institutions and and enforcement characteristics that it's going to maintain their order but do little else but as they become more stable over time and they do if they allow for the growth of economic activity for example which will lead to the growth of specialization division of labor the development of Agriculture the beginnings of manufacturing services and so on as they become more elaborate the institutional framework becomes more secure and they become less dependent on violent state a mature natural state is one or more or a limited access starter is one in which you have a quite elaborate structure of institutions and organizations that make for societies being quite well-off quite well-off but you'll note the key feature of a natural state is that why you capture some of the potential gains of increasing specialization and division of labor which from Adam Smith on has been the basis of increasing productivity you don't capture it completely indeed the fact that you allow for monopoly rent-seeking and limited competition means that you never capture the complete games that you get from a society in which you had competition I'm gonna come back to the natural state with that word competition leads me to the third kind of social order which is an open-access society an open-access societies are a recent development they began in Western Europe the Netherlands Dutch first and then the English French and gradually spread spread overseas possessions of the English and so on and the open access societies key feature is that you have competition in both economic markets and in political market now that's crucial because if you have competition only in economic market why then some some economists or some economic group that wants to preserve its rents if it gets hold of the political system will simply restrict entry and therefore maintain monopoly positions and don't misunderstand me everybody would like to have a monopoly including us academics more than anybody else because after all a competitive world is a very insecure world it's a world in which you never are secure which you've got a continual to struggle and improve and all the time and indeed the economic model of of the world that I'm talking about it was the one that Joseph Schumpeter most completely characterized as a world of creative destruction and it's a good term pre creative destruction but as creative destruction precisely was characterized what you have is a world in which innovation creation of new products and persistently creating more innovation and new products is an ongoing process an ongoing process that goes on forever and because it does it means that rents tend to be temporary and because they're temporary therefore they you wipe out monopolies but you'll note that in the the creative destruction part means that you can get very rich in this world because if you invent a better method of doing things than your predecessor you may wipe out the previous way of producing but you'll have four until P utter the next group catches up with you you'll have high incomes and make substantial profits and that process of done of creative destruction that Joseph Schumpeter characterized beginning in the early 20th century is the key to an open-access society it's what made the world rich and indeed so much so that when you look at the contrast between limited access societies and that an open access society there's an enormous difference limited access societies to use that jargon and the numbers of economists typically have he could have per capita income that does not exceed $10,000 per capita open access societies have per capita incomes that usually range anywhere from twenty to forty thousand dollars per capita is a big gap limited access societies are based on personal knowledge personal exchange of who you know is what counts open access societies are based on impersonal knowledge the development of secure impersonal property rights treating everybody equally and indeed providing a framework in which the rule of law and a judicial system dominate the way in which the system works to translate it into the jargon that we economists use limit of access societies have low costs of transacting in all kinds of markets political genomic social markets and that means that you get the advantages of trade and exchange and economic growth in all kinds of different margins and therefore when we start try as we do to measure the costs of exchange in different kinds of markets we observe that in open access societies it's very low because in fact again you have competition to do things more productively and creatively and if somebody can do it more productively and creatively as long as you have ant free entry into economic political and social activity then that process is going to continue to grow now at this point I hope you're saying to yourself well why wouldn't all societies be open access societies the obvious gains are so vast for of open access society over limited access society that clearly the advantages of one over the other are substantial now don't misunderstand me limited access societies grow after all they've that you can have economic development and but it'll be limited development it will never be anything like what you can get with an open access society so that what we when we observe limited access design moving from fragile to stable to mature they are progressing along a line in which they're gradually building more complex institutions extending the rule of law and certain dimensions and so on that is making it possible for them to be more productive but they run up friends fundamental obstacles as long as the game is played within the constraints of rent-seeking dominating the way in which elites deal with each other and protect each other's rents why is the limited-access Society so difficult to change well because the elites that run limited-access societies which usually make up no more than ten to fifteen to twenty percent of the total population the rest of the population are well they may have some rights but they will certainly have less secure rights than the elite groups the Olivia Slee the elite groups stand to gain by maintaining the structure that provides the rents for them which make them rich and which provides a framework therefore that provides security for them prevents violence and the disorder and so on and therefore provides a basis that has provided a degree of social order for ten thousand years how do you transfer from a limited access societies and open access society obviously you don't do so very easily for the very reason that the groups that run the social order of a limited access society is made up of elite groups that are interdependent and control and are related to each other and in order to destroy that and create an open access society you've got to wipe out the monopoly rents that are the basis of the stable structure of that society now once you understand that you begin to understand why it's very difficult to move from one to the other and indeed why World Bank and IMF and groups like that that have attempted to improve a lot of poorest nations fail they fail because the policies that work in an open access society competitions secure property rights and things like this when you would apply them to a limited access society are going to wipe out the rents of in that society and those rents are the framework the basis for what prevents disorder and violence so that the in order to move from with limited access society to an open access society you've got to have change that goes on in such a way that the elite groups gradually transform themselves from one to the other because it's their self advantage to do so so let me give you a very brief sketch and then I want to work quit talking so that you have a chance to discussing what what you have to have happen is first of all elite groups will in their own self-interests established property rights because that provides secure relationships as when they trade with each other but gradually they observe that they can extend profits by extending property rights to larger and larger groups and as they do obviously this widens the basis of exchange and therefore the profits and rents that they can get gradually this creates institutions and organizations that become to some degree autonomous and independent of the elite groups and to the extent it does these organizations take on a framework of their own and make possible wider and wider potential profits the development of trade and commerce and exchange groups therefore becomes gradually independent of government ownership and indeed with limited access society the organizations that are created are created as creatures of the government but that limits your ability to capture lots of profits when trade Anik and markets can expand and some so gradually limited access societies can the elites in their own interest may expand trade and gradually therefore expand the range of activities that they will engage in and that will lead them to more complex institutions and organizations that in turn become more and more independent of the control of the existing elites so the first doorstep condition is that it leads extend property rights the second is that you extend them and create institutions and organizations that have a degree of autonomy from them which allows them to operate in ways that are will gradually undermine the monopoly position of of elites and third of all and last you've got to have as a third doorstep condition that the military comes under civilian control of all the things that have characterized limited-access societies is when elites get in trouble they have called in the military to put down disorder or put down conflict in their own self-interest and therefore the military has always been at the beck and call of the likud interests somehow rather than you've got to get elites which gradually your military which becomes gradually increasingly independent such control now this has happened and indeed in the book we've just finished we have detailed stories about how this happened in Western Europe and in other parts of the world and why it hasn't happened and why and what the obstacles to a happening are in limited access societies like Mexico or countries like this but obviously it happens and as it does happen it gradually transforms the nation's one nation from from a limited access to an open access society and one that goes from personal exchange to impersonal exchange and one that realizes the potential there for a productivity that's inherently in a world of competition of the kind that I'm describing well we still don't know a lot about the process and the reason why we don't is that while social order has certain key features that I try to describe these specifics of every society are different because they've have a different cultural heritage to take just one illustration of one of many that I could give you take China which is in the still a limited access society but evolving very rapidly but the way in which China evolved the kind of institutional change that has been responsible for the dynamic process that's going on in China that's moving it from fragile to to a mature natural state has been one that doesn't look anything like what happened in the West and the West we see the development of property rights the growth of firms the growth of judicial systems if you look at China it begins with the with a transform of transformation of the the rights of peasants to receive a greater a greater portion of the their income for themselves and then a creation of town village enterprises and local villages which certainly didn't look like firms as existed in the West and on and on so what you have therefore is every country is unique the cultural heritage is different they've had different culture and because they have the way in which they're going to evolve is going to be specific to that particular Society now the reason why this is important of course is because well there's generalizations about the characteristics of one social order versus another and the certainty with an open access society it means you have competition secure property rights impersonal exchange but how you get there is going to be specific to each particular country with a particular cultural Heritage's that has the particular institutions it has and if you don't understand that obviously you're going to not understand how to transform that society to make it work well what works and is transforming China it's very different than what's works and it's transforming India today and what's worked what and what is still way far away from being transformed places like Haiti are very primitive natural state so like that everywhere they're different well this is the framework for our study because it suggests clearly why when we try to make a improve societies we have such a difficult time doing it the way to improve with society is not to try to apply the the principles that work in a in an open-access society but to instead to try to prop incrementally change the institutional framework of the natural state so that it works better and moves it in the direction of the doorstep conditions that will eventually allow it to become an open access society now let me say in conclusion I don't mean to imply that open access societies are ideal and limited access societies are terrible or not limited access societies have many virtues and indeed some of them work very well within the limits imposed and open access societies are subject to all kinds of constraints that I don't like and indeed open access society if you ask me where they're going it's a good question we're creating a world which has no parallel with anything that existed in the past it's a new unique world and to the degree that it can going to continue it's got to continue by our understanding what's happening to us and which is an ongoing process because I'm going to conclude with my favorite term which always runs there it gets everybody to run to the dictionary it's an on-air Ghatak world now an organic world would be which is a fundamental underlying structure to the system so that if you understand that structure you'll always get it right when you try to deal with the problems and economics are always assumed it was a narrow Datuk world and they're wrong it's an honour gothic where we're evolving a world of economic political and social institutions that has nope no paralleled anything that ever existed before which is continually evolving and changing and in which therefore the kind of policies that will work and be effective in making it work better in time t I'm not going to be necessarily the same things that will work in time t plus 1 plus 2 Plus 3 plus 4 and so what we're facing all the time is not only that the world is changing and we've got to understand that that world but how do we understand a world of keeps on evolving of this kind well the only way we can hope to understand it is by is since its new new and novel is by experimentation by trial and error we can hope to understand it by keeping on when we run into a new problem trying out different kinds of policy to see how well they work and if you think I'm saying something that doesn't have immediate relevance take something as simple as how the international capital market works today as contrasted with yesterday in the day before yesterday things like the internet zero cost information and technological change associated with the computer have completely transformed the degree to which capital movements can occur in ways that were never imagined and in fact if you go back to to looking at earlier times and you start with the telegraph which is the beginning of rapid low cost information transmitted instantly or almost instantly and the succession of things that have occurred you observe that that just with that one technological dimension is transforming our world in extraordinary ways all the time so if we're going to understand the world we kind of got to keep on trying to experiment and see what works and discard things that don't work and if we continue to do that we have a prospect that Wilson continued to survive in a world that they've still a violent world thank you well III thought you're gonna end on an optimistic note and say that world peace is coming instead you say we still live in a violent world before I throw the floor open for questions let me just ask you the the first question okay you mentioned that you were once a Marxist you know as you know Marx you said you do not know we do not know where we are going Marx had a very clear idea where we are going he said we're gonna have the withering away of the state you'll all be completely free we can fish in the morning write poetry in the afternoon hunt in the evening your your your food in your future you see that institutions are gonna be eternal that we know but ring away of the state in fact the state will continue to play a bigger a bigger role forever so if Marx was here how what would you say to him about why his vision was wrong well I'd say Marx asked all the good questions you didn't get very good answers and I mayn't mean that because the reason why marked was so impressive was that Marx came along at a time and when we didn't have any good dinah dynamic process of change theory and he had such a theory of the stage theory feudalism capitalism to socialism and he had technological change being the engine and and class groups being the end being the actors well all of those were very useful concepts they just were much too simple to deal with the world we live in I mean take take the actors classes don't are the actors typically typically it's much more groups of elites or of different kinds that play a role in transforming the society so what we've tried to do and what I've tried to do in in evolving from Marxism is not to throw it out because I think it's a very valuable way to think of our problem but to translate it into a dynamic process it seems to fit the kind of evidence we have about how societies work again how social orders work and how institutions were what Marx understood was the incentive structure was crucial and not I think is terribly important what has been missing from economists economists have always thought about as a as a as a world in which serves there's incentives are always there in fact it's it's a zero transaction cost there's no cost of exchange that no costs of activity and so it's that was missing most of the fundamental thing we're trying to build into a framework that trying to make sense out of our world great okay question time please come to the mic and introduce yourself and pose a short sharp question professor North likes to be challenged by the way so don't hesitate okay the more you challenging the happy edges but just come to the mic and okay we start with a handsome gentleman in the back stavros yanaka Lee Kuan Yew School of Public Policy won one potential floor in in your your theory which you could say you can share with Marxism is that it it runs the risk of being very linear it implies a certain progression from primitive to various stages of natural state and on - to the open access society that you speak of another potential way of looking at it though is that we is that history fluctuates between various points you know various natural states occasionally interrupted by open access societies until you get to a situation where a new group of elites form and then by definition they will revert to the natural state of wanting to have limited access so what what is your view of that contract theory that's a good question because one of the things that we have asked ourselves in writing this book do do nations fall back from being open access societies back to limited access their natural state so far we don't observe that gonna qualify that in a minute about take a country that's very close to fitting that that particular framework which is Argentina which I've spent a lot of time advising the government of Argentina Argentina was the sixth highest income country in the world in 1940 by nineteen eighty that fall into third-world status and but and had stagnated and then it had a spurt of rapid improvement but now it's falling back again into disorder now was it ever an open-access I was very close to it whether it was or not but it's it comes close enough to making a point to tie that then it seems to me if we would expect to see societies fall back into opening the limit of access orders and certainly one of the things that I hope that you'll challenge me on is no society that we call open access is completely open access in the United States we have all kinds of rents and agricultural and land ran and groups that maintain monopolies but the basic heart of the open access society is still one in which effective competition dominates the way in which the system works even if there's all kinds of exceptions to it and I think that's true now whether that is so embedded into this into the institutional framework that you can't fall back depends on whether you can get control of the polity and the political system is the key not economics I mean if you get control of the polity it so that you limit entry and so you can maintain your your monopoly privileges then you're gonna go back to natural state we don't see that too often but I thought doesn't mean it couldn't happen gentlemen from you I'm gene Levine from Singapore Management University and I've been a fan since my first year in graduate school when I write your seminal work on institutions and as I was reading it I was thinking to myself what an insightful sociologist I was disappointed later to find out here we're not a sociologist but I'm still fascinated by the world and there's a particular side of it that I'm interested in and let me quote we form mental models to explain and interpret the environment thus the mental models may be continually redefined with new experiences including contexts with others ideas and this is from the back end of understanding the process of economic change or 2005 book and I'm interested in the question of how notions ideas concept of institutions flow between individuals between region between countries how do you see the initiation of institution and their spread throughout societies do I have ten hours you have ten and a half seconds and you better be brilliant okay right no but now that's a I mean the the deep underlying framework that this book is built on is built on around how mental models evolve what how they get constructed in our brains and how they change our mental models change with new experiences or with with with things that happen that are not consistent with the mental models and that's the heart of what supposedly it's the way in which change is going on all the time so you've asked you know the key question that the book is written about but doesn't lend itself to you're talking about in 10 15 20 or 30 minutes it's we spend a several hundred pages dealing with with that process I'm not begging the question it's just that I can't go into the details I mean just take something as simple as conflicting views about how the brain works and I'll give you just one simple illustration there's a general view by a lot of cognitive scientists the brain works like your computer so that the software in your head is exactly like a computer now that means it's it's orderly stable and and logical but one of the things we've observed about the way in which human beings interpret evidence and build frameworks it's not very it tends to be impressionistic and it tends to have to have a process that is we see a certain structure existing and we tended to use that structure for different kinds of problems and when we do that sometimes it works and sometimes it doesn't work for example to take a simple illustration economics was founded on on the basis of physics and the principles and the logic and structure and organization were inherited taken over from that set of principles well the same is true at any time we try to understand somebody in the world we tend to take some orderly structure that he fitted over here and apply it over here sometimes it works and sometimes it doesn't but that's a involve some very complex assumptions we make about how the mind and brain are working that we certainly can't go into here the good question institution or the attempt to take institutional structures from one place and apply them somewhere else that gets ill another set of issues which is you know how if you have institutions that work in country a are they transportable and Trent can they be transposed in the country sometimes they can depends again on how the institutions are on the flexibility of the institutions and on the degree to which the change in the institution is consistent with the belief system that varies with different system for example one of the things that is a immediate issue of interest to us here in this room and everywhere is the degree in which Islamic fundamentalism can be transformed into something that hopefully it's more less violent more peaceful and you know we don't have good answers to that at this point but it's right up the alley of the issues you and I are concerned with because if we're going to have peace in the world we can't do it in ways that we we in the United States Senator which is to kill off people to disagree with us we seem to be very good at instead we better find ways to understand what not doesn't mean we've got to give in it means we better understand them so we understand it with the basis of differences and we can start to then build a bridge to communicate effectively with each other and so the whole framework that I'm trying to develop is one that tries to get fundamentals that I think are crucial for in the long run solving problems so the ten-second on says by the book hi my name is Richard Kearney I'm from the S Rajaratnam School of International Studies Wow all the schools here and I think like many of us here have been a big fan since graduate school especially and I wanted to ask you a question that's kind of related I guess to the question that was just asked you defined culture as being comprised of beliefs and institutions and I wanted to ask you if you could define more precisely what you meant by beliefs because it seems to me that it could be on the one hand the preferences that individuals or groups have it could also be knowledge in the sense of understanding what works and what doesn't work and just to elaborate just a little bit if you're talking about groups having enough power to overthrow the elites then it strikes me as more likely that the individuals in that group are unlikely to have the same level of knowledge but would more likely share the same kinds of preferences so does beliefs depend more upon the preferences that the individuals of a group share rather than their level of knowledge or what do you mean by beliefs oh boy I got another five or five hours beliefs consist of the way the way we understand what's going on then they're not only made up of of our understand but they always have an implicit understanding of what is and what and by contract what should be I mean when we when we construct our world we never we it's it's not independent of saying well this is the way the world works and once you understand what you understand the way the world works then you also implicitly have an assumption about what will or won't work now part of that is preferences that is what you what you'd like to have and how you relate preferences to beliefs is very complex and indeed something we still don't know a great deal about we used to in economics we used to take preferences as given and assume that there were therefore they were outside of economic reasoning but Gary Becker who was one of the architects really of trying to transform a lot of the way in which we understand the world always a good Chicago economists so he's kind of limited in how he does it nevertheless woke up one day and decided that preferences were something we ought to we ought to take into consideration because if if you don't take into consideration preferences you can't understand a lot of the changes going on which are preference change people's views about what ought to be changing and again preferences may be derived from practical experience that as you you observe something you don't like the way it works and so you just changes your preference or it may be independent of specific activities and have evolved as an intellectual process and all like what came out of the Renaissance and modern development take it take it a simple illustration until late 18th century it was not held generally that slavery was immoral but starting in the 18th century we began to think it was immoral for one human being to own another human being now that evolved as a as a set of changes in preference that really became a very powerful influence on the way in which actions took place and led to eventually to the elimination of slavery around the world so preferences come out either for intellectual activities or by experiences in which we run up against the way things work we don't like the way that working with they change our abusive that's not a very good answer but we don't have a good answer sir thank you I'm Trini and from editor with Asia 360 you've obviously raised many issues and I just want to kind of since I'm from Singapore and and I sense that you've been hesitant in trying to comment about the host country and at least from some of the some of the features you've described of a limited and an open society we could we could see maybe perhaps Singapore veering towards from stable to towards probably mature limited societies but I'm not sure to what extent these categories are really helpful I mean essentially it seems that the distinguishing factor between limited and open is this competition if you if there is political competition if there's economic competition then and it's good its lowest transaction caused and all that but surely that in itself is not an endpoint I mean it really depends from country to country and society to society political competition for for what purpose and for the purpose of stability for the purpose of greater political diversity or even in terms of economic competition I mean we know that countries have different stages of economic development and competition for a country which is very backward may not necessarily be a good thing you probably want to protect it you perhaps want to actively create a rent-seeking capitalist class to kind of you know jump-start your private sector and also the assumption that the political elite or the economic elite invariably tends to be rent-seeking but we know as you have mentioned we have this very complex issue of culture and beliefs and arguably in Singapore Li's I'm sure many of my competitors share this view is that the elite in Singapore perhaps maybe up to this point we don't know what happens in the future has not been terribly rent-seeking it has been guided by other beliefs about nation-building or creating cohesive society so how do you fit that into what you have just discussed it's obviously a very rough sketch of what is contained in greater detail in your book thank you well I'm not sure I completely understood your question but let me state the way I I think I understand it and see if I'm first of all there's no normative judgment and what I'm what I'm talking about about whether it's good or bad I'm trying to get at what makes societies and economies materially well-off versus those that remain poor and that's a straightforward question it it does not imply that being rich is good or being poor is bad it does imply that there's a universal desire on the part of populations around the world to get better off and indeed that's reasonable now don't misunderstand me all competition is not necessarily good I've made competition the frame from the basic framework of of limit of an open access society but to give an illustration is one of my favourite ones although not necessarily of the author of this illustration I had a very good friend in the Soviet Union who is a banker and when the Soviet Union was transforming itself for the end of the Soviet Union in 1991 in 1982 1991 why I remember talking to him and he said oh it's gonna be great Doug he said we're gonna have we're gonna have competition and world's gonna be great and the next year when I saw right after yeah after the Soviet Union disappeared become Russia I said well how are things going he said well he said we have competition but he said the competition is in in banking is you kill your competitor and he said I'm not it's not clear that that's an ideal kind of competition I might even get killed the next year so that it's not when you talk about competition you mean competition that is constrained at all kinds of margins it's it's it's when we Adam Smith who was our patron saint talk about the dynamics of competition in the world he always made it an unmitigated good but it's only an unmitigated goods if you constrain the players so that they compete in ways that make it more productive and creative but don't do things like kill your competitor well all of the terms that I've used need to be much more carefully qualified when you start to think about what you mean by a structure that and how it works and I haven't had time to do that very effectively so on one Singapore would you say one line and Singapore well I think you wanted to give you see how do you want that you have me say one line on Singapore one line about Singapore it's a great place I think you stop there okay next question I'm Tatiana Rosita with the Embassy of Brazil in Singapore I would thank you for a very enlightening lecture first I would like you to comment on the possible impact of international or multilateral organizations on different nation-states natural States because it seems that since the at least since we've been thinking about development more formally since second world war only a few countries have made it from natural state to open access societies than they are in Asia and so this is one part and the other part is to what extent that this multilateral gain is a organizations have been facilitating or actually hindering this you hinted at the World Bank the beginning but then during the lecture you haven't been back to that so I would like you to elaborate on this of course the United Nations and multilateral organizations which yeah to extend to United Nations the World Bank IMF WTO you know have actually facilitated or 300 this the transition if this is possible the the transition to from from a natural state to an open access society well I don't think the UN has played much of a role in what the UN's most positive role has been is trying to reduce conflict around the world and to the extent that that they have whether it's a very very effective means of extending really but they have not played a role really in in transforming natural states into open access societies at least not to my knowledge the World Bank and the International Monetary Fund have deliberately been concerned with that issue that is their their their objective has been to try to make societies more productive and while they don't haven't use the terms I'm using women's access to side although I might add the World Bank is in the process of adopting our framework and so that they're going to in the future probably use it but they haven't they haven't been concerned with and what we've tried to do is try to develop a framework so that you can incremental e improve the performance characteristics of natural states and eventually move them to the doorstep conditions that they could become open access society and what I the heart of my argument has been you can't do that automatically immediately it's a gradual process and it's one that's fraught with danger because if you if you try to impose conditions on a national state you may you you may make it so that it it it it loses its cohesion and and the things that hold it together and as a result you get you get violence and disorder thank you last question from our lady I am yelling from the center an Asian globalization my question is on international cooperation in a world where a lot of the problems we face today are global do you think that open access states can work together with limited access states to come to a solution that makes everyone better off or will we be crippled by the most fragile and most violent States or do you think that in a world that's globalizing very rapidly we are developing global mental models and shared beliefs that transcend nation boundaries which will help us deal with the global challenges of today while globalization is something we're all for at least we economists are all for but it's a two-edged sword and globalization is not without its dangers globalization on the one hand produces improve overall economic well-being since free trade no economist is ever gonna argue that free trade and free movement of goods and services and people in the world would not improve material well-being but when you start to look at it in detail and particularly look at the political instability generated by some things that are parts of of a globalization process and it's not clear that again you can you can do this without creating disorder and violence and so on certain margins so I guess what what I would say is that what I would like to see is globalization but proceeding in a way that was self conscious at every step along the way about whether you're destabilizing society so that they don't they work more poorly because you under Munder mind that thing that made the natural state in these societies work and provide us some degree of order and and and stability and that's a something again that we don't we you know very little about one of the things that is the heart of what we're trying to do in this book and in the work I'm doing with a group of people is trying to understand the dynamic process of change and one of the things that is crucial about understanding that dynamic to the extent that we do understand it is the delicacy with which order and and stability persists in the world and this is particularly true in a world where we manage to create weapons of such enormous destructive ability not only I'm not talking just about nuclear weapons but also all kinds of weapons that make it so that terrorism is is such an effective tool things like that are going on all the time and we don't you you've got we don't understand what kind of things will encourage or discourage those kinds of things are occurring we don't know that I mean one of the things that I'm I'm impressed with I've been impressed with a number of people who spent time since I've been here in Singapore talking about it and talking about this phenomenon not only and in Islamic world of the Near East for the Islamic world and in South Asian saan is the degree to which terrorist prospects under a contender undermine and threaten stability order and and and and progress that is going on in various parts of the world we just don't know enough about those things but we would do we do want to be self conscious about because while economic improvement is certainly something that we're at least as an economist time for I want to be sure I can do it without creating more disorder in the world and that's a neat trick you know I did say last question but there's something about the natural state of lectures by the questions always come at the end so would you mind if we take that the last three questions do you mind you're you're the boss I'm your disposal I'm a big shot okay I suggest that we take all three questions if you don't mind quickly and if you want to take notes we'll send them you can answer them all together so I'd want to detain professor North he say use his voice a lot so I think we want to not strain his voice too much so I'm gonna take three quick questions in that order and then give professor not the last word and then hopefully you can end not too late before after 7:00 please thank you very much my question will be very short my name is Missy from beautiful country called South Africa I'm an MPP junior with the El Callao lky SPP and profitless thank you for an interesting account of different states and how those societies and different states impact on the economy and bearing in mind as you obviously did that each and every society is different and but also coming from Africa and when I grew up I grew up in a society that was giving a society that cares about the other person and not necessarily being driven by profit or such interest now at least when I was growing up now today those kind of society is a very limited or completely wiped out by different kinds of societies do you think they can be reclaimed or were they is it necessary to regain such societies thank you this question is he grew up in a society that was very giving very compassionate can we go back to giving compassionate societies instead of what we have today which are less giving a less compassionate society was talking about Africa that's right okay next question yes hello professor um I'm accounting student from a local university forgive me if I'm asking something stupid okay my question is creative destruction is classified the emergence of new ideas in a national innovation system so how is economic growth generated by new ideas reflected in your emphasis on the free free work of institutions in an open exercise society yeah okay next question last one this is definitely last one India meets all the three criterias of freely derive the Lee Kuan Yew School India meets all the three criteria of open access societies that you have described and it always has actually since its independence what would you attribute other than increased competition the tremendous growth that it is witnessing and does culture have any role to play in this that's a question about India India has had all the excess all the characteristics of an open-access society there the question is what else does India need to have to succeed actually what I'm the question is what has changed in India then since it met the criteria since its independence to now what has changed in the past decade that has let's do it's tremendous growth in this culture have any role in this no okay well I'm not sure still I understand the question about Africa and compassion but let me just say that that if you look at that performance characteristics of countries around the world sub-saharan Africa is right at the bottom it has had negative growth in the last twenty years so that people in sub-saharan Africa are poorer today absolutely than they were twenty years ago now that's very very unusual because overall in the last twenty years an enormous percentage of the world has grown not very well but they've grown and also poverty has been reduced substantially around the world so Africa is the exception and a very serious exception and mostly because we have not understood how to break Africa out of the tribal heritage that it's had and transform it into a social order that would allow for improving productivity in in Africa where the productivity growth this is negative most of the time now I have some very good friends that work in Africa and if I had time I'd give you their description of it they start with with a view that Africa has such enormous fluctuations in climate and soil and so on that it has been very difficult to develop orderly ways of producing that can realize it second of all property rights are very imperfectly specified that go on I don't think I want to take too long but just suffice to say that our experience in Africa is that is a dead loss at this point with respect to being able to improve performance economics what generates economic growth with the growth economic growth is generated by new knowledge by knowledge that gets us to understand better how to be more productive and that new knowledge can be technological change would and this has been the dominant way economists have explained the economic growth is by technological change that has made us more productive by producing machinery and so on that replaces human hands and human minds with things that work much more productively or economic growth comes about by simply expanding the skill knowledge of people in a society and so on so the sources of productivity we know a lot about and we know a lot about the things by which human knowledge has been improved and transformed and made useful to take just one simple example the development of a modern University knowledge applied to solving problems of scarcity is a relatively recent development about the last 150 years it began in Germany in the late 18th 19th century in the chemical industry in which the Germans began to develop ways of making synthetic chemicals and using them from a variety of things it had its expansion with countries with in the United States with Universe she's like MIT that combines chemistry and engineering to produce a whole new way of thinking about that's going on all the time and it is but the fundamental underlying source one is new knowledge but two is developing institutions that implement that knowledge and apply it for solving human problems and that's what we're interested in here that's what the whole nature of a social order is the degree to which it provides incentives to develop new knowledge and to use it effectively India well I don't know much about India well I know enough to know that it's been in India first of all had the great advantage of British domination for maybe a hundred hundred years or so and the disadvantage that that imposed with respect to to maintaining and perpetuating a set of political and social institutions that tended to to rigidify Indians development and akan courage elite groups to perpetuate the way they did things and it's only in very in the last 10-15 years that gradually they're breaking down the rules and and so on in India that's allowing for more perfective and productive ways of producing India is a classic case of a place where where you had institutions that have encouraged inefficiency and and and failed to develop or a ways of improving productivity that's been changing very rapidly in the last of eight or ten years so the India now gradually is coming out but it for example is not having nearly as rapid progress as China has had which has been much more open to rapid transformation of the institutional framework in the direction of providing for incentives for more increasing productivity China is all by itself in that with respect to the rapidity of that process as compared to India well professor not the two reasons why we're very grateful to you for giving this lecture first I'm sure you agree that we learnt a great deal I certainly feel that I have learned enough to let me buy your book so you have one customer and I think a few hundred other customers here for your book but the second reason actually the more important reason may be we've tried very much to send a message in Singapore because public policy education is still very new in Singapore the public policy education is really the Sunrise enterprise in academia it's the place where you bring together the difference disciplines and try to understand the world in the holistic fashion and you have demonstrated today why everyone here is your support and Lee Kuan Yew School of Public Policy so on the happy commercial