Culture and Development

While most economists remain locked in a historical tug-of-war—cycling between the worship of Zeus (the market) and Prometheus (the state), each following either the whims of a mad king or the decrees of the temple priests—sociologists and anthropologists have consistently emphasized the importance of harmony for any functional social organization (Hobhouse, 1922; Midgley, 2003; Hodgson, 1997; Hodgson & Knudsen, 2004; Heiner, 1983; Callon, 1998; WCCD, 1996; UNESCO, 1997; Rosman et al., 2009, and others). Their central argument is captured well in this quote from the World Commission on Culture and Development (WCCD, 1996, p. 48): “Development divorced from its human or cultural context is development without a soul.”

 

We shouldn’t overstate their importance—they often resemble old men who keep insisting that the sun of their youth was warmer than the sun of today. They are the high priests of the Egyptian god Amon, who granted order through Ma’at—the moral force that upheld the divine rule of kings and the stability of Egypt in a chaotic world. These thinkers argue that Ma’at is the only path to paradise beneath the earth. Egypt, they insist, was heaven, while the rest of the world staggered under darkness and disorder. This view is clearly expressed in a synthesis by UNESCO (1997, pp. 45–46):

 

“Tradition represents a medium-term between the long-term perspective of ecological evolution and the short-term perspective of human desire for progress and change. As such, it constitutes an essential store of knowledge about the relationship between human beings and their environment… Culture, then, is the vital intermediary between the finite perspective of the individual... and the fabulously complex order hidden beneath the apparent chaos of nature… If development is to be sustained for the benefit of future generations, it will need not only the wisdom of past generations, but also the impersonal wisdom with which tradition unfolds…”

When Egypt is the only world you know, it’s not difficult to accept the stagnant rhythm of survival as a way of life. These cultural advocates warn us not to tamper with tradition. Like the high priests of Thebes, they caution against disturbing ancient wisdom, threatening catastrophe not only in this life but also in the afterlife—here, the future generations. “Respect Ma’at or perish,” they proclaim. It may sound absurdly impractical, and often it is—but beneath their simplicity lies enduring wisdom. Let us first appreciate that wisdom, before uncovering the absurdity.

 

Humans are not endowed with a multipurpose rational mind. True multipurpose rationality would require a universal deductive capacity that we do not possess. The evidence is overwhelming across disciplines (Cimoli et al., 2006; Arrow, 1969; Hodgson, 2007; Nelson, 2006; Simon, 1962, 1985; Kahneman & Tversky, 1982; Cosmides & Tooby, 1994a, 1994b, 1996, and many others). It’s amusing to see Einstein portrayed in films as an omniscient genius, or to hear people say, “It doesn’t take a rocket scientist,” as if expertise in one field equates to all-around intelligence. Brooks (2008, p. 1) humorously illustrates this misconception:

 

“I am standing in the magnificent lobby of the Hotel Metropole in Brussels, watching three Nobel laureates struggle with the elevator… I like to think of scientists as being on top of things, able to explain the world… But maybe that’s just a comforting delusion.”

 

Nobel laureates may be brilliant in their domain, but they’re not necessarily adept at everyday problems. Our minds are not general-purpose logic engines. Perfect rationality is a myth. Yet in our imperfect world, the kind of mind we do possess is remarkably effective (Cosmides & Tooby, 1994a, 1994b, 1996). Rather than searching for universal solutions—which would demand more knowledge, memory, and processing energy than we have—we look for context-specific strategies.

 

Consider the process of starting a business. If you attempt to plan for every contingency, you'll never begin. You lack all the information, capacity, and energy to foresee everything. Trying to do so leads only to paralysis. Instead, you begin somewhere, and through a process of feedback and refinement—thinking, experiencing, adjusting—you move forward. But where do you begin?

 

In practice, we use rules of thumb to estimate which paths are more promising. If the current problem resembles one encountered before, then experience and culture guide the selection process. As Simon (1962, p. 472) observed:

 

“Problem solving requires selective trial and error… human problem solving, from the most blundering to the most insightful, involves nothing more than varying mixtures of trial and error and selectivity.”

 

Most of our problem-solving follows this model: means-to-end analysis. We identify a desirable outcome, then reverse-engineer a path to achieve it. When you first encounter a complex model, you don’t grasp every part rationally—unless you’re already an expert. You start with a rough understanding. Over time, through effort and exposure, your comprehension deepens. You might eventually revise or reject the model entirely—but only after step-by-step engagement.

 

However, our inability to think through every scenario becomes a liability in social life. A single set of information can be interpreted in vastly different ways. Beyond informational imperfections, the imperfections of knowledge itself can breed confusion and conflict (Mezgebo, 2014). To manage this, our thinking must be narrowed—limited to shared frameworks. Some of this narrowing is biological—what Steven Pinker (1997) calls the hardware of the mind. But much of it is cultural and experiential (Hodgson, 1997; Heiner, 1983; Callon, 1998; Hodgson & Knudsen, 2004).

 

Biology supplies the hardware, but culture provides the software. Biology tells us to eat, but culture tells us what’s edible. One person relishes a rat stew, while another gags at the thought. The reaction feels instinctive—but it’s cultural conditioning at work.

 

A vivid example of culture’s role in shaping cognition is the case of the Wild Boy of Aveyron (Cayea, 2006). Discovered in 18th-century France after growing up with no human contact, he behaved more like an animal than a person. He never acquired human language, and despite years of scientific effort, he failed to develop beyond basic social skills. Biology may offer us potential, but without culture and experience, it remains unrealized. Culture shapes how we think and what goals we pursue.

 

Culture and experience teach us what is rational or irrational, moral or immoral, fair or unfair. They shape our notions of virtue, vice, purpose, and perversion. By framing our understanding, culture simplifies the social world and enables harmony.

 

For society to function harmoniously, there must be shared understandings—norms, values, morals, and ethical systems that define both how people think and what they pursue in life. Rousseau (1762) called this the “general will.” Ibn Khaldun (1978) referred to it as “group feeling.” It is a powerful tool that helps guide individuals toward social goals by shaping both their mental framework and their conception of self. Clark (1918, p. 12) put it well:

 

“He can make nothing out of the world that the world does not first make out of him… He is at the mercy of whatever system he happens to be born into for creating, transmitting, and directing stimuli.”

 

Does this mean we can mold people however we wish? Some, like McCloskey (1987, 2002) and Skinner (1972), thought so. But there is strong evidence against the idea of a “blank slate” mind (Cosmides & Tooby, 1994a, 1994b, 1996). In truth, any system of identity, culture, or morality must remain compatible with human biology to be sustainable. Still, the mind is elastic enough to host a wide range of cultural diversity—as long as it enhances fitness in the long run (Mezgebo, 2014).

 

What society can indeed shape is our definition of self, using the principle of extended identity. A person who identifies as a patriot serves the nation. A scientist chases truth. A football fan lives and dies by the team's score. A humanist seeks to advance human dignity. Identity shapes goals. Culture and experience then generate the associated norms, values, and beliefs to form a cohesive society. In short, both society and individual experience program our minds and direct our lives (Mezgebo, 2014).

 

This has major advantages. We don’t need constant coercion or high-powered incentives to coordinate people. As Hobhouse (1922, p. 68) wisely stated:

 

“Compulsion is only deemed necessary to secure predominance of creed by those who do not in their hearts believe that creed to be strong enough to avail by its own acceptability.”

 

Why do soldiers give their lives for their country? Why are people willing to sacrifice everything for an idea? It isn’t just about long-term rewards or social respect. It’s about deep, effective socialization. Akerlof and Kranton (2005, p. 9) describe this well in their account of West Point:

 

“On plebes’ first day at West Point… They strip down to their underwear. Their hair is cut off. They are put in uniform… They must repeat a formal greeting until they get it exactly right, all while being reprimanded for every mistake… This is just the beginning of a training program that re-engineers identity to produce loyal officers ready for battle.”

 

This is not limited to military academies. It’s the thread that runs through all history. Why does William Wallace give a rousing speech before battle in Braveheart? Why do sports teams invest heavily in unity and motivation? Because the strength of collective identity can mean the difference between failure and success.

 

Socialization can also take darker forms. As Kuran (1987, p. 663) notes:

 

“Regarded as 'polluted', [untouchables] are barred from village life… Yet they tend to consider these restrictions neither exploitative nor offensive… Many believe their inferiority is karmic… They genuinely feel that they are best off working with the system, not fighting it.”

 

If people can be programmed this low, how hard is to program them so they can achieve better life for themselves, family, society, nation and the world. The practical question of practical man will be at this point: how does this apply to our daily life? There are those who even reject the connotation as unpractical in market economy. Fuller and Winston (1978, page 357-358) stated

 

There are two basic forms of social ordering: organization by common aims and organization by reciprocity. Without one or the other of these nothing resembling a society can exist…. It should be noticed that the conditions which make these two principles of ordering effective are directly opposite to one another. To make organization by reciprocity effective the participants must want different things; organization by common aims requires that the participants want the same thing or things.

 

The authors finally conclude that if man is going to be end by himself than means to an end, organization by common aim should be replaced by organization of reciprocity. In simple words socialization is only applicable for communist system not for market oriented system (Fuller and Winston, 1978). However the role of socialization can be found in both bureaucratic organizations and exchange institutions all over the world as can be seen in examples below.

 

Ouchi (1980) do insist on the fact that the two problems we face in any coordination problem are the problem of diverse goals of decision making agents which made an organization and problem of performance ambiguity. In one side decision making agents are selfish and often have goals which are not necessary consistent with objective of the organization. You can use market incentive or coercive power to guide them to right direction but still this is hard to do if performance evaluation is not precise in identifying productivity.

 

This will allow us to work on socialization or on modifying the goal of individuals to be consistent with goal of the organization (Ouchi, 1980). In real world socialization process is the most commonly used way of organizing people to given objective. But it is often given least emphasis in actual research work within economics, excluding pioneering work of few. We should notice

 

A bureaucratic organization operates fundamentally according to a system of hierarchical surveillance, evaluation, and direction. In such a system, each superior must have a set of standards to which s/he can compare behavior or output in order to provide control. These standards only indicate the value of an output approximately, and are subject to idiosyncratic interpretation. People perceive them as equitable only as long as they believe that they contain a reasonable amount of performance information. When tasks become highly unique, completely integrated, or ambiguous for other reasons, then even bureaucratic mechanisms fail. Under these conditions, it becomes impossible to evaluate externally the value added by any individual. Any standard which is applied will be by definition arbitrary and therefore inequitable (Ouchi, 1980, page134-135).

 

This is problem of bureaucratic system, because it needs continuous and costly follow up to make it efficient. One possible solution is market forces to be used. When performance measurement is easy, market will easily handle any opportunistic behavior. However if performance measurement is poor and the workers’ and employers’ goal are not the same; some form of socialization in to workers and employer clan will be effective. The clan will reduce the occurrence of opportunistic behavior and can be useful when the performance measurement is very costly or impossible. Clans are organic solidarity between closely related persons but not necessarily family members. And the socialization process will embody organizational goals in to their personality so they can push organizational objective by harmonizing their interest with the organizational objectives (Ouchi, 1980).

 

People who build strong teams always work hard in guiding the goal and psychology of the team members as they work in other structures of performance like facility, machinery and training. In every meeting and programs, governments do work hard to guide the intention and goal of people in right direction by using different propaganda methods. Socialization is effective tool in guiding people in to functional system. After all the most important resource is humanity and directing humanity in the right direction is the best way to achieve better performance. More practical explanation can also be found from Cox and Fafchamps (2006, page 22-23) who insist that

 

Identification with a group can also be created artificially by providing bonding experiences such as initiation ceremonies and other kinship activities. We suspect that bonding is strongest if it is accomplished at a young age, probably around puberty and in teenage years. This tends to bond people of the same age together. Once the kin group has been socially engineered, it can serve many of the same functions as extended family…… Other social phenomena, such as religious sects and brotherhoods can also be used to generate strong bonds and engineer a family feel. Churches often seek to tap into the emotions triggered by family relationships by using titles such as “father,” “brother,” and “sister.” The use of such titles demonstrates a desire to trigger the same emotional attachment as ideally found within an extended family.

 

Even in business firms the importance of socialization is well documented by Akerlof (1998) in stating efforts are not simply determined by wages only and formal contract, but also by the sentiment that the agent has to the firm and coworkers that create gift exchange condition. The workers will work hard as group given their sentiment to the firm and coworkers and the firm will return the gift in gift by giving more incentive, not firing people and acting fair in terms of norms defined internal to the workers and the firm.

 

Not only the positive side of socialization, but we should also notice the fact that wrong kind of socialization can also create serious problem in performance too. From example, the detrimental effect socialization in contract farming of Peru can be seen from the following observation of Glover and Kusterer (1990). According to the authors, contract farming was promoted in Santa and Viru with foreign credit which is channeled by contract buyer. Initially in Santa there were corrupt practices which are introduced by lack of proper accounting procedure. However even after the problems are solved farmers are observed to have negative attitude to everything that the company did. While farmers in Viru, who understand the process better, are able to have better attitude toward contract farming. This result is observed despite the fact that farmers in Santa benefited from contract farming more than farmers in Viru. This clearly shows lack of right socialization can be serious obstacle in any development effort.

 

The above facts and observation of our world clearly shows there is more to the world than the bad economic models predict and assume. In general any organization has three components of drive. One is reciprocity like market, another is coercive power like control, sanction and audit and most importantly there is harmony that units group of decision making agents under similar, if not the same, goal.

 

The implication of the above analysis is that what determines efficiency of organization is not only related to incentive structure used in reciprocity like market and the efficient use of coercive power, but also how the people are harmonized in to functional unit. Morality, ethics, trust, norms, values, culture and tradition are the reason why most people behave the way we expect them to behave. In addition the goals we chose in life are often defined by the society we found ourselves at birth and the societies we live in. Those tools as result can be effectively used to improve organizational efficiency as it is done in army, churches, clans, socialized business and soon.

 

What does this mean in practice? Don’t use you are fired and promotion only as carrot and stick to promote efficiency. Socialize with your workers by creating conducive working environment and sense of family (Hirschman, 1970). Explain, motivate and harmonize interest of your workers to be consistent with your organizational objective. Develop and internalize values, ethics, identities and goals in your workers that promote efficiency. As family you have to teach morality, ethics, norms, desire for hard work, self respect, nationality, humanity, other values and identities which are corner stone of our society in organizing us in to civilized human society. In schools teach duty, ethics, morality, honesty, hard work, nationality, right and civil servant attitude in your students not only by words but also by the way you live in.

 

The question is how elastic is this process? What socialization allows us is to rise above mere animal which lives by crude self interest. However as we are ethical beings, we are also dominantly selfish beings. This is very true how elastic the self seems to be. As result any identity, norms, values, ethics and culture we choice should able to generate better fitness to the decision making agents which made the organization in the long run. A West Point solder will not accept military norms which expose them to military defeat in battle field in the long run or that makes them slaves of poverty in long run. When institutions of harmony work to achieve not only organizational fitness but also decision making agents’ fitness in long run, they will have long standing relevance (Mezgebo, 2014). Despite this fact how far we can go in short run is function of wider realities that one found him/her self. Discussing this will push us beyond objective of this book; that is why for sake of brevity this will not be addressed here.

 

Now we are ready to visit Egypt and the high priests Amon, the god of order and harmony, in their temple. What they say is traditions, norms, values, cultures and way of life are result of generation of trial and error which ensures the survival of the community. Not only wisdom is to be found on those institutions of harmony but also in way of life of the people. Imagine how birds perfect flying, fishes swimming, bats listening, humans thinking and soon. If you lose those animals and human beings, you lose a knowledge about flying, swimming, listening, thinking and soon. By studying birds we learn a lot how to fly and by studying fishes we know how to swim. This is because nature is storage of high functionality that is been tried and tested to be proven highly functional.

 

The same way in centuries of trial and error, cultures are adapted to different reality of humanity in this earth and they store a lot of known and unknown knowledge in life and thinking of the people. If you lose tradition you lose such knowledge that is known or that could be identified by study, after all bat have no science about listening and fish about swimming. That is why they insist if you lose traditions you will perish in the long run because you are destroying wisdom and truth stored in the tradition and you are replacing it by unproven ideas of the time.

 

Now it is time for reality check from someone who is able to visit the world beyond the order of ma’at under Egypt (see Kuiper, 2011). How much do we know about city of Ur around Babylon (see Rogers, 1900)? How much do we know about the first capitalist culture of Phoenicia (see George, 1889)? What do we know about the toilet inventing civilization of Asia (see Childe, 1929)? We know not much. Now imagine I can give you time machine and you can see their life in the past from now. Can you really make huge difference in our life which is as large as survival and extinction? Can you even give us very useful tools which determine human welfare as big leap? Or can you go to hunter and gatherers of Amazon and the short jungle dwellers of central Africa, and can you make decisive difference to humanity then after? Unless someone who is out of touch with reality, s/he can see the knowledge we can gain from such society is not much specially in social side of life.

 

However still there could be plants and animals that could be identified from such society that could cure Aids. Even some wisdom could be gained from life of Egypt, Greek, Babylon and hunter and gatherer of Amazon. So could you insist the tradition of Egypt, Greek, Babylon and Sparta should be preserved as it is, so we can use it as storage of knowledge and wisdom? Can any human with basic sense of right and wrong say this? Do you want to keep poor people under their own poorly functioning tradition, so they can preserve their culture? Worship of ma’at is a lie.

 

Yes tradition should not be lost as much as possible. Yes tradition should grow without losing its base. However growth always has loss and gain. You cannot preserve all the past without destroying all the future. Yes, if change must happen it should be built in existing good culture while refining bad cultures. In every refinement there is always type I and type II error and you cannot avoid both of them at the same time. But you could be careful in the process.

 

Most importantly your culture and tradition is what is odd and beautiful about you. So you have to grow to the world being you. If you can, please try to store and preserve as much as possible from your tradition without destroying your future. However to walk naked and to do absurd backward cultures that you know are stupid just for sake of tradition is absurd level of impracticality and being clues less in this cruel world. Old man you may keep complaining about the new sun and you may insist on glorifying the old sun, but you will die and time will go on without you. But as wise old man you could help the new generation to learn your wisdom and grow it farther by refining good from bad. After all if old generations learn, why is the new generation forced to be stupid who never learn? Is this because of the book of the dead?

 

Why is that we don’t learn much from old social cultures, as much as we loss from them do need explanation at this point. This is because our mind is not clean slit. Our basic operating system is determined by biology and the level of flexibility allowed for culture is not that much large. Most importantly most of the flexibility we observe is in flexibility of culture expression not on the basic thinking of the mind. The surplus of organization is what creates the flexibility in form of diverse cultures by rising man beyond mere survival. The essence of our thinking and life is not very different at all, though its expression can vary.

 

Humans are very diverse in their odd expression of identity not on their mode of survival when they face similar ecology. That is why much is not lost especially from social side. Or you can prove me wrong. Go to jungle of Amazon and teach me something new about any institution. If I give you 100 years to study them how much knowledge should I expect that can change humanity despite what you will say “they live in harmony with nature” and I add with poverty and poor functionality. Even if you can find something useful, it will not be as big as their poverty and uncertain life that you are framing them to accept as the best way to live. The reason why you don’t want to lose them is because a scientist will never want to lose the most useful evidence at his/her disposal. Nothing more and nothing less!

bureaucracy in development

How does bureaucracy work?

The abusive implication of the terms in question is not limited to America and other democratic countries. It is a universal phenomenon. Even in Prussia, the paragon of authoritarian government, nobody wanted to be called a bureaucrat. The Prussian king’s wirklicher geheimer Ober-Regierungsrat was proud of his dignity and of the power that it bestowed. His conceit delighted in the reverence of his subordinates and of the populace. He was imbued with the idea of his own importance and infallibility. But he would have deemed it an impudent insult if somebody had the effrontery to call him a bureaucrat. He was, in his own opinion, not a bureaucrat but a civil servant, his Majesty’s mandatory, a functionary of the State unswervingly attending day and night to the welfare of the nation. (Mises, 1994, page 1)

It may seem odd to speak of bureaucracy as efficient and responsible, but for many important functions of government, bureaucratic organization is the only way to approach acceptable levels of efficiency and responsibility. Before governments instituted bureaucracies, tasks were randomly assigned to amateurs who held positions on the basis of their friendship with a monarch or a politician. It was impossible to determine which person was responsible for which decision, and there as little specialized training. In contrast, core bureaucratic principles clear lines of specialization and the strict application of written rules enable the modern Internal Revenue Service, for example, to process millions of tax returns quickly and, generally, with considerable accuracy. A less “bureaucratic” arrangement would simply not work. (Danziger, 2008, page 274)

The bureaucratic system was one of the great inventions of humanity which granted continuity in state mechanism with every change of governments. If we take Ethiopia for example before the time of Emperor Menelik the capital city and state apparatus was changing with every change in the power structure of the country. This forced the development process to restart from scratch again and again with ever changing government. However the Emperor introduced bureaucratic system which was able to stand change of government which includes modernization of the Empeior under Haile Selase, socialism under Mingustu and the current government since 1991. The time of bureaucratic system was time in which the country is able to achieve sustainable transformation of the economy at different speed.   

The problem is when dealing with complex developmental problems, while trying to outrun the market, the bureaucratic system is less flexible to changing conditions and the incentive system of public sector needed to promote efficiency is loosely linked to efficiency (Williamson, 2000). That is why development, which needs dynamic, efficient and flexible decision making, will face rigid bottle necks from the public sector.

First, decisions will take longer time and such bureaucratic rigidity will negatively affect efficiency of the public sector (Williamson, 2000). When dealing with dynamic beast like market, which generates ever changing opportunities and challenges, a state needs adaptive and dynamic bureaucracy, who can adapt to reality as it comes. The problem is the bureaucratic system is rigid and less flexible to find local solution to local problems. Often decentralization is promoted for flexibility but this may not be perfect solution either.  

Decentralization will face problem of centralized capabilities. When capabilities are centralized, decentralization of power is simply another source of inefficiency in some cases. We should notice there is concentration economies working to concentrate human capital, resources, industries, business, goods and services and infrastructure in big urban centers (Krugman, 1991). Under such reality decentralization of power will be coupled with concentration of capability. The second problem is that the public sector facing highly asymmetric information problem will have less capable works, which normally work less than their full capacity (Williamson, 2000 and Stiglitz, 2001).

Let’s debunk the second problem clearly. There is a tendency for state to pay lower salary, in most part of the world, which will create adverse selection problem (Stiglitz, 2001 and Williamson, 2000). Only option less workers, which can’t find alternative employment, will be employed at low paying public sector. Of course given imperfection of labor market and since state is the most important employer in developing economies, state could attract more capable workers often. For example study by Tsegay (2012) in Ethiopia did found most educated people are government employee. If we take France for example the most qualified professionals are recruited from Ecole Nationale d’Administration (ENA) with higher incentive to join government and government workers are paid more than private sector workers (Danziger, 2008). Worst example can also be found in some cases. For example Danziger (2008, page 269) stated

In communist political systems, government bureaucrats are often recruited and promoted on the basis of their commitment to the regime’s ideology rather than on the basis of their technical expertise. Following the Cuban Revolution, for example, agricultural production suffered because managers of state farms (officials in the Ministry of Agriculture and bureaucrats in the agrarian reform agency) were often selected on the basis of their commitment to the revolution, even if they knew nothing about farming. In both the Chinese and the Mexican bureaucracies, young administrators wishing to advance up the organizational ladder must attach themselves to a more powerful patron within their ministry or agency. As that patron advances up the bureaucratic ladder, he or she will bring lower-ranking “clients” up as well.

However in general, when there is low salary, low salary will create adverse selection problem for state as highly capable and highly productive individuals will go to other sectors in search of better life, despite capacity of state to keep large army of efficient workers for itself.

The problem is since reward in public sector is not directly related to productivity; there will be series moral hazard problem among the civil servants. It is not easy to measure performance of public servants as government often focuses in general goods and services which benefit the society. There is no market price or high powered incentive system that can guide performance (Williamson, 2000 and Stiglitz, 2001). Under such reality state uses proxies of performance. The most commonly noticed index of performance are education and experience (Stiglitz, 2001). The assumption of those indexes is that the more educated and the more experienced individuals are more productive. The problem is first capability is not the same as productivity. These are proxy of capability not measures of productivity. Capable individual who exerts high effort is highly productive. As the result those indexes cannot perfectly measure productivity because they don’t account for effort.

In addition they are good proxy but not perfect indicators of capability either. What we want to measure is learning by doing using experience. The problem is learning by doing is function of not only time but also speed of learning. Different people learn differently as result speedy learners will be undervalued and sluggish learners will be overvalued by such system. The same problem is observed in education where formal educational certificate cannot perfectly measure knowledge and intelligence. The best learners will be undervalued and bad learners will be overvalued under such system again.

Under such reality hard work does not pay because what matters is education and experience. Decision making agents will focus on acquiring certificate of education than knowledge and in accumulation of experience than making difference. You work hard you benefit nothing and you work less you loss nothing. In this context even more efficient workers will drag their feet to preserve effort if they are selfish. In simple words there is no adequate incentive for civil servants to be as efficient as private sector employees (Stiglitz, 2001 and Williamson, 2000).

However personal rationality is signaled and corrected by collective rationality. There is tendency in highly efficient society personal efficiency will be premium for personal success. In free riding society personal efficiency will be fetter of personal progress (Stiglitz, 2001). If everyone is working hard and someone starts free riding the society will stand against him/her to expose him/her. If someone is working hard in society which is free rider, the new agent is signaling change is possible and high productivity is attainable. In directly the worker is demanding unrewarding hard work on the rest of the workers. This is why social pressure will be exerted in hard working individuals to make the working environment harsh to live in and they will crate fetters that will chain the life progress of hard working individuals into dust bin.

Since state under adverse selection and moral hazard problem will be endowed with less hardworking individuals the culture will signal and promote inefficiency against exceptional efficiency. This is well documented in China public sector companies before introduction of market signaling with economic reform (Hayami and Godo, 2005). It is very common observation to see civil servants who use their social capital to discourage exceptional productivity by ostracizing efficient workers. Both economic and social institutions, found within the public sector, will not promote efficiency of civil servants. Observing that civil servants are inefficient, the state has rational base to pay low salary, keeping the vicious circle ongoing! This is classic example for institutional failure in which wrong institutional structure guiding rational agents into loss-loss situation. This will give us third indictor of performance that is average performance of all workers in similar task.  

Based on this Williamson (2000) insisted on the fact that the low powered incentives, complex laws and structural rigidities are introduced within bureaucracy in order for them to focus on goods and service which are highly public in nature and not easy to measure. His conclusion as the result is that they should be used as last resort when everything else does not work.

However such conclusion has limitation as it is functional conclusion (Bardhan, 1989). First human beings are not just selfish but also have tendency to have elastic identity. Culture, ideology, professional identity, professional ethics, moral duty, nationalism and religion could serve as counter check in such inefficiency related to adverse selection and moral hazard (Chang, 2001 and Stiglitz, 2001). Most importantly few centuries ago bureaucracy was not dominant mode of governance and there is always ways to find institutional structures which improve state flexibility and efficiency. Most importantly state can work in creating right identity, ethics, moral duty, patriotism and soon that could check such failures. The visit of West Point military academy by Akerlof and Kranton (2005) which express how youngsters are shaped in to functional group with different moral and identity explain a lot how far state can improve its efficiency. More will be said in this point next under socialization because state when trying to create right socialization for its inefficient structures by using its inefficient structures themselves, the result is often endless comedy which ends in sad tragedy.

Source Danziger, 2008

It is logical we have to accept the fact that all public servants are not inefficient, there are pockets of efficiency everywhere and there is chance to improve inefficiency of state as there is chance to improve inefficiency of market. The problem is the system, except in exceptional conditions, is not very reliable. This is true unless it is made to be reliable by historical accident or careful engineering. A state who try to play big role in any development need to really solve this problem by careful engineering.

Role of State in imperfect market

The important point about market is that it will tend to solve its own failures in the very long run. Not only market forces will improve themselves on long run, but also complementary local institutions will spontaneously emerge to solve the problem of market failures (Hayek, 1988; North, 1971 and Arrow, 1969).

Say a farmer may have credit and input problem which limit its production in face of increasing demand for agricultural products and rising prices. However as the price keep rising, the level of profitable opportunity for solving those credit and input problems will increase. In this reality it does not take to be rocket scientist to know in few decades someone will figure out how to make money by financial innovation or input market innovation. The profitable opportunity will stimulate the rise of institutions that can solve credit and input problem in the long run. This is the blind watch maker system of market which makes it a self reappearing machine.

What non economist and often economist mix up is the market modeled in text books with the market observed in the real world. The market in text book is fantasy of economists in trying to explain the virtue of competition, which is hidden from the visible world as invisible hand. The market observed in the world is result of century experimentation with exchange by generations of humanity starting from gift exchange. It is pride for me to repeat the admiration of Hayek (1988) in stating market and market prices are one of the greatest inventions of humanity and one of the greatest institutional steps which create the great leap for humanity. Have you ever wonder how our society is organized in to such civilization? When you ask this, you will see the huge virtue of market as institution. Or try to explain to visiting alien from distant planet how our world works and market will come again and again as virtue of our world. Market is very good tool that can destroy humanity or help humanity, no matter its imperfection. We are not advocating don’t touch my market and virtue of selfishness of Rand (1957 and 1964) or only small change is allowed of Hayek (1988), but we are advocating for careful intervention in approaching a complex system like market. Why?

Market is not developed by stroke of a pen, as the result it cannot be changed by stroke of a pen. Change does demand evolutionary understanding and evolutionary policy which is pragmatic and outcome oriented in nature to use it for improved functionality than dogmatic big push of late state free moment (North, 1992, 1994). Market is evolutionary and often ugly in its process. Imagine how many years the farmers have to be in poverty and customers without adequate supply of agriculture products before the market respond to change. Far worst, if the opportunities for profit are not adequate or if there are institutional supply rigidities; market may not solve its problems at all. Market may decide to marginalize or to destroy some communities in long run.

This is like saying given adequate time our body will develop capacity to stand AIDS, which is of course after death of millions of peoples. There is also chance nature my choice our extinction as the right solution. Any evolutionary based system is self sustaining and self perfecting in nature and market is classic example of that because it is one of the most adaptable system to change compared to most human institutions. Does this mean we have to bow to rule of market as advocated by Rand (1957 and 1964), Hayek (1988) and WB (1997), without any question? No, because the unfortunate implication of the above logic is that we have to wait 200 - 300 years or more in order to achieve the level of development attained by developed economies. Far worst even delayed success is not granted in long run, if we are not fit at all. The million dollar question is then what is the proper state intervention? Before we go there, let’s listen to few cat fight and food fight of Academy of Plato.

There are those who advocate historical development is caused by market (WB, 1997; Smith, 1776; and Hayek, 1988) and there are those who present counter agreement for high role of state in historical development (Chang, 2007; Reinert, 1996; List, 1909; Rodrik, 2007; Cimoli, et al., 2006; Wong, 2004). Yes historically government intervention was fundamental in any development. It is true fact that as government of China promotes its industries and business, the government in USA does also promote its own productive and business interest. Historically the imperial government of UK did make high intervention to promote its industry and international trade position. No question about it. Even some may find data that shows the highest state intervention in the world is done by USA to conclude free market is just policy prescribed for the poor so the poor can stay poor and the rich can get richer.

The problem is that the world we see is not like this. Is USA, let alone now even historically, less of an advocate of free trade than China? Is freedom highly restricted and managed in USA as it is in China now? Is the freedom of the market in USA as restrictive as the freedom of market in South Korea in time of its development? This black and white view of reality which does not see the rainbow of reality in social life is the reason why the let state free moment and the let market free moment never stop bickering forever in never ending cycles of historical phobia.

Can any reasonable mind think market and society has less freedom to work under the blind watch maker system of market in USA compared to China and South Korea in time of their modern renaissance? In USA market has bigger role of organization while government tries to take leading role in Asian renaissance. When market led economy is identified the lead role of market in resource allocation is well respected in most life of the people. This is true in historic USA and UK, as it is true in current time. We can see non black and white view of this colorful world from Freeman’s (1998) historical analysis of development where importance of freedom, innovate culture and institutionalized technological innovation is clearly taken into account. While Chang (2007) did give more emphasis on state lead institutionalized technological innovation only ignoring other sides of the dynamics.

It is true any wise government will not simply promote static comparative advantage. For example Cimoli, et al. (2006) observation of Asian renaissance did lead to conclusion that static inefficiency is intentionally created in order to create high return industries in terms of dynamic comparative advantage by firms which can compete at international market in long run. The same reflection is given by Wong (2004) and Chang (2007). This is also supported by historical evidence of List (1909) and Chang (2007). All governments work hard to promote domestic industry including the contemporary governments of USA, UK, European Union, China, Japan and soon. Any wise government will do it, because when we operate in the blind watch maker system of market we have foresight that can be used in the due process. We don’t simply let our life to fall in mercy of market forces all the time, we do what we know is possible in order to milk the market cow as much as possible.

However this is not all economic history of the world, where the great government comes in to picture with sward of developmental state to share the ladder of development and fire of knowledge from the rich Olympus lead by Zeus to poor people of his own country. There is more to economic history of the world. For example even if USA government promote technological development of different industries to crate comparative advantage it also allow high level of market freedom which includes challenging the ultimate decision of government as unconstitutional, if necessary. Can we say the same for China? Even if UK in its industrial revolution and expansion of trade used its military might and global dominance to promote its industry and worked hard to restrict trade in some commodities in its industrial revolution time, there was more intellectual freedom, innovation and market development which lead to development vibrant private sector in the due process who end up limiting the power of the king himself. Adam Smith did challenge the status quo and even Marx did find refugee in England, while List is treated like criminal in Germany for advocating industrial development by state intervention. The world is not about black and white. The world is not about letting state or market free. It is about what works and what does not work. To promote industry is one thing to tell them what specific management and technology they should follow is another thing. There is degree difference in level of divisibility and freedom given to people between UK and USA verse S. Korea for example in letting the blind watch maker system to work. Some catch up stories of Asia often involve micro management of performance and direction of firms than just simple promotion and investment on industries. See Wong (2004), Chang (2007) and Cimoli, et al. (2006).

Can we say state intervention is always useful? No the world is endowed with endless list of state failures which are as large as market failures (WB, 1997). What heterodox economists do is pick winners in the game of development with heavy state involvement and they give them new name as developmental state. If Brazil, Venezuela or South Africa where to end up being success story in our time, they will be great example of developmental state. When they fail market forces, international powers and lack of developmental state will be blamed for that. Government everywhere do try to achieve development so everything is not about letting state free as everything is not about letting the market free. All what heterodox economics supply is why orthodox economics is wrong and why state is often right, when the reality is much complex than that. In this respect observation of Colander et al. (2003, page 6) is important

Often the fundamental intellectual content of a heterodox school is rejection of orthodoxy, or at least major elements of orthodoxy. In economics, at least, beyond this rejection of the orthodoxy there is no single unifying element that we can discern that characterizes heterodox economics. In fact, it is well known that many varieties of heterodoxy have more disagreement with each other than they do with orthodoxy.

The point we are trying to make is that first there is no clearly understood consistent theory which explain development through state intervention as result the solution is not letting state free as the solution was not letting market free. Now ignoring the constant bickering of economists the important question is what is the important role of state in evolutionary market dynamics. To understand role of state we should understand the importance of human foresight. Why wait until market favors institutional solution after misery of millions? Why not state involvement to facilitate the evolution of necessary institutions and if necessary to promote direct state intervention to create better life for the population in sustainable manner? Why wait until nature cure AIDS or allow our extinction through natural selection, when we can increase our odd of survival by foresight based adaption. This is where state can play important rule in compressing the gestation period of development by helping the market function better.    

However we also know comparative advantage could be created through careful planning and strategic intervention. This is another area where state intervention could be useful in creating distortions and promotion in the market, like control on foreign exchange, allocation of resources, allocation of public investment, infrastructure development and state policy to promote the development of high value comparative advantage which can generate sustainable better life for the population. The question is not if such interventions are needed. The million dollar question is: can state despite its failures and structural rigidities attain this.

The standard notation of orthodox school is to state the Hyades of communism cannot win against the tender of Zeus in form of market competition. The standard notation of heterodox school is worship of Prometheus. Prometheus is the Greek god who shared fire of gods with humanity by steeling it from Zeus.  He also did trick Zeus to take the bad meat. As result humanity is able to enjoy the good meat for lunch, while having superiority over all animals by gift of fire. What they cry is let Prometheus free and he will make us prosper while facing the fury of the all powerful Zeus. Zeus does not care but Prometheus do they say.  

But such certain conclusion is absurdly impossible because the reality of the detail is much more complex (Rodrik, 2007). Let’s make it simple to understand. First there is issue of capability either to know the solution or to develop it by trial and error. To deal with complex structures like market you need pragmatic mind which uses his intelligence carefully. If there is knowledge that would be simple, but as Rodrik (2007) point it out the micro details are very diverse and it is hardly possible to have one general theory which works everywhere. This will make development a learning experience and the question becomes do you have good feet which can over run the market to bit market dynamics. The orthodox school will say no (see WB, 1997) and the developmental state promoters will say yes (see Chang, 2007; Reinert, 1996; List, 1909; Rodrik, 2007; Cimoli, et al., 2006; Wong, 2004). Personally we have seen where government had great achievement and we have seen where government has great failures. The answer simply depends on specific reality. We cannot say no because China and South Korea did it well. We cannot say yes because the failures are countless.

Another problem of state intervention is it demands honest dedication, by all parts of government up to micro level, to such policy especially as state intervention increase in magnitude and micro detail. Neoclassical assume human beings are always selfish. Their conclusion as the result is more state intervention and especially micro management will lead to corruption (WB, 1997). Those who promote state intervention either accept some corruption as legit (Chang, 2007) or assume the existence of dedicated state which is Prometheus of our modern area (List, 1909).  

In space dominated by highly selfish beings the state apparatus is dysfunctional and open for corruption. This will be explained in great detail next. However human beings are not ego centric atomistic selfish being, as they are enlightened and strategic in their selfishness (Mezgebo, 2017). As result the self is very elastic. If national identity, professional identity, civic duty, trust and soon are well developed, they can be important driving force in solving the moral hazard problem of state intervention. If we take South Korea for example, inhuman oppression that they face under Japan and new ignited nationalism did create strong sense of national identity which was useful tool in promoting their state intervention in effect manner. However such identity, unless it is carefully engineered or it exist by historical accident, is hard to come by and easy to corrupt. Imagine living in slum house and under poverty in service of your country when everyone is getting richer around you.

Under such reality it is not always necessary true state intervention would be gift of fire from Prometheus but another time and resource wasting state intervention, which can be added to large list of failures promoted by state. Here is where books written to promote developmental state seem to fit. They seem trying to create the view point that if right kind of state uses its hands right it can compress the gestation period of development. After all those economies who used strong state hand in recent years did able to compress the gestation period of development to less than 50 years in Japan, less than 30 years in South Korea, Singapore and Taiwan, and less than 20 years in China. The interest of books written by advocates of developmental state seems to come from desire to create awareness that if we used it right state intervention could work in reducing the gestation period of development.

The real choice however is not between free market and Free State. The choice is what works and if you can make it work, you can even use astrologists and traditional healers as governors of development let alone state. However though we like to act as governors of market, often the weak person do tend to show off a lot because his/her weak base of power, in reality it is not logical to stand against market dynamics in the long run. Even China, South Korea, Taiwan, Hong Kong and Singapore did try to make the market work for them by playing it right, but they did not try to get outside of market dynamics in long run. That is because it will be suicidal to defy market in very long run.

First problem is we don’t know how to organize our dynamics in long run by completely defying market dynamics all in all in very long run. Even if some genius figure it out how to defy market in long run, still S/he needs to operate in international market organized by market forces. This is why those who think they are governing market are often governed by international market dynamics. If in long run you are governed by market forces, you cannot be almighty God of domestic market, but just local administrator of local market under long run leadership of international market. Now let’s explain state failure to kill the Greek myth of Prometheus, so we can see the real state as it is. Often it is shame to see well respected economists trying to solve moral decay by increasing the power of state in social life. This is because they are under the spell of Prometheus’s witchcraft and they are not thinking right.