This is Mike Munger , the knower of important things from Duke University . A prebend is a type of benefice , an income or stipend attached to a collegiate or cathedral church . It was historically given to a canon or a member of the clergy . In practice it meant that certain church lands or revenues , like rents , tithes or endowments , were assigned to a clergyman to support him in exchange for his service at the cathedral . The clergyman who held such an income was called a prebendary . Now if that sounds a little bit like feudalism except in the church , that's right . Today we're going to talk about how a prebend is a little bit like feudalism , except in government . The core meaning of a prebend is a provision or allowance given for support which in the medieval church context , became specialized as the income that was attached to ecclesiastical office Turns out , a prebend is a good way to think of corruption in developing nations and Douglas North's theory of lock-in which is caused by transaction costs .
Speaker 1There's a new twedge this month's letter plus book it a week and more Straight out of Creedmoor . This is Tidy C . I thought they'd talk about a system where there were no transaction costs . It's an imaginary system . There always are transaction costs . When it is costly to transact . Institutions matter
and it is costly to transact .
Speaker 1Douglas North extended Ronald Coase's concept of transaction costs the cost of measuring , enforcing and exchanging property rights into history and politics . On the economic side , markets don't work automatically . They depend on institutions , laws , norms , enforcement . To reduce transaction costs Without institutions , exchange is too costly and specialization is limited . On the political side , the state is both the solution and the problem for transaction costs . On the one hand , the state creates and enforces property rights , lowering transaction costs . On the other hand , rulers can exploit their monopoly on violence and in defining property rights to raise transaction costs in ways that benefit elites . Rights to raise transaction costs in ways that benefit elites mostly themselves . Thus politics itself is a transaction cost-laden bargaining process between groups with constitutions and political rules acting like contracts that structure this bargaining .
Speaker 1North had a theory of feedback in politics . He emphasized the difficulty of useful and accurate feedback . Now there is positive feedback under some circumstances . Good institutions that is , secure property rights , rule of law , checks and balances on rulers reinforce themselves because they encourage productive investment and cooperation . Those countries get rich fast . But negative feedback also reinforces itself . Bad institutions tend to persist Rent-seeking , patronage and corruption , redistribute resources in ways that entrench elites and make reform harder . The implication is that nations often simply can't correct bad policy with better ideas . Bad institutions create a feedback loop that blocks learning . Elites benefit from existing arrangements and have little incentive to allow change , even if the policies themselves are socially destructive . This explains why nations often remain stuck with bad rules despite clear evidence of failure and the fact that everyone knows that there's a better system .
Speaker 1North argued that people interpret the world through what he called mental models , cognitive frameworks that are shaped by culture , ideology and experience . Many of our beliefs are wrong . Mental models are imperfect maps of reality , built from limited information and from biases . People adopt ideologies that make sense within their culture , even if those things are in some sense objectively false . People also resist change , even if they are given correct information . Part of the reason is that belief systems are costly to abandon and restructure . It's a kind of transaction cost . Belief systems are socially embedded . They provide identity . They reduce cognitive complexity . Even when confronted with evidence , people may cling to their ideology because it fits with their group identity . Information is costly to process and it fits with their group identity . Information is costly to process and it's frustrating to have to think about it , and incentives in political systems often reward loyalty over truth-seeking . The implication is that institutional change requires not only new rules , but also shifts in shared mental models what the entire society believes about fairness , legitimacy and authority .
Speaker 1North compared nations' institutions to individuals' beliefs . Both can be wrong , but they also both can remain stable . His concept of Lockean captures why .
Lockean occurs when early choices—laws , property rights , political bargains—create path dependence . Path dependence means that once you start along a path , it's hard to go back to an intersection and start a new path . Institutions generate vested interests , expectations and complementarities that make reversal very costly . For example , a society that entrenches slavery or monopoly privilege may find it nearly impossible to reform later because too many groups depend on the system . Those groups depend for their legitimacy and for their income on the existing bad , corrupt system . But that means that they will fight , often literally and certainly politically , in order to maintain that system , in spite of the fact that other systems are obviously better . Lockheed explains institutional persistence . Even inefficient rules survive because there's stable equilibria those who benefit can block reform and those who suffer lack power to coordinate change . Especially , they face the collective action problem , where many people each would benefit a little , and the organized elites each of them would be harmed a lot , even if the total benefits to the populace far exceeds the harm to the elites .
Speaker 1North's broader claim is that , just as people remain bound by false beliefs , nations remain bound by bad institutions , not because better options are unknown , but because the cost and political resistance to change make bad equilibria self-reinforcing . So , in sum , transaction costs explain why institutions matter , and it's an extension of the Coase theorem . The assignment of rights is irrelevant if transaction costs equal zero . So institutions don't matter if transactions costs are low . But as I have the quote from Douglas North at the beginning of this podcast in the intro music , institutions matter if there are transactions costs , and there are always transaction costs . Feedback explains why bad models persist . Mental models explain why people misperceive reality and cling to ideology even in the face of contrary evidence . And lock-in explains why nation gets stuck with bad institutions even when better ones are known . Lock-in is a classic theme in Douglas North's institutional framework .
Speaker 1Corruption persists not because people like it , but because it becomes embedded in the incentive structure of the state . Once officials , bureaucrats or party networks learn that they can reliably extract bribes from licensing or the withholding of public services , that source of income becomes predictable and thus part of their livelihood . The system then resists reform because reform would cut off an established revenue stream and reform must obtain buy-in from those very officials who will lose their income or else that reform might face resistance and quite possibly a coup . So when you think about licensing or permits , if you can't do something unless you have the state's permission , then Having the permission is more valuable to you than it costs the state to provide it . But the state recognizes that and it's a monopoly . You can't get permission anywhere else . So officials in many developing societies have discretionary power over permits . They trade licenses , construction permits , land titles , import clearances for under-the-table payments . That discretion becomes then an opportunity to ask for , and in many cases demand , bribes . As Northwood put it , this creates a kind of path dependency . Once a particular way of doing things is established , organizations have incentives to continue that way , even if it's inefficient .
Speaker 1So India famously had the license raj , and in fact we did a Tidy C episode about this earlier and I'll put that up in show notes so you can go back and look at it
. But the license raj meant that virtually every industry needed government licenses to do almost anything . So , as one Indian businessman recalled , the license was never denied if you knew whom to pay . Now notice the problem . That's both type 1 and type 2 error . It meant that anyone who applied for a license was always given to it , and they might not be qualified , they might not actually be going to carry out the business in a way that the original legislation that created the licensing process had in mind . But everybody who paid did in fact get a license . No one was denied . Some people should have been denied and some people should have been given the license for free because they qualified Under the license Raj . Everybody was given a license , even those who were not qualified , because the only qualification was that you had to pay the bribe to the bureaucrat .
Speaker 1So when officials can delay or deny public services and this can be almost everything think of all the things the government has a hand in Electricity connections , passports , driver's licenses , access to health care , building permits , the right to use a ration card for a bus they can extract payments . Once this becomes normal , both sides actually start to expect it . The political scientist Richard Joseph , in studying Nigeria particularly , but later in looking at a variety of government activities , coined the term Prebendalism , and it comes from , as I discussed at the outset the idea of the prebend , or the set-aside , as a source of rents or income for ecclesiastical officials . Now Richard Joseph was being a little bit puckish about this , because he's treating government and developing corrupt society as a kind of church which you had to worship if you wanted to survive . Prebendalism , then , describes how officials treat public office as a source of rent . As Richard Joseph said , the officeholder regards his position as a prebend that he may exploit it to benefit himself , his kinship and his ethnic group .
Speaker 1This system locked in corruption because networks of patronage depended on those illicit flows . So in Kenya , the World Bank noted that anti-corruption campaigns struggled because civil servants in key ministries view bribe income as a substitute for low wages and therefore resist reform that would eliminate it . In fact , in many cases in a lot of developing nations , the effective salary of many offices is negative . You have to pay your boss for the right to have this job , and the reason is that it's as if it's a franchise to collect bribes . I have an office where people have to come in and get building permits , and I will only give them the building permit if they pay me quite a bit . I will pay my boss bureaucrat in order to have this office . So if I say we're going to end corruption , my job doesn't pay anything . This is my only source of income and so you can get very strong resistance . So in many cases the state underpays its employees , effectively relying on bribes as a supplement .
Speaker 1Reform then faces a really strong internal veto . So in the 1990s in Russia , one observer put it customs officers earned $10 a month in salary , but their positions are worth $1,000 a month in bribes . Firing or rotating them did little to change the system , because the office itself was valuable , precisely because of its corrupt potential . In fact , the officials carefully calibrated their prices in order to maximize their revenue , and any bureaucrat would do that . If you changed people out , the next bureaucrat would likely reach the same conclusion about what is the profit-maximizing rate of insisting on a bribe ? About what is the profit-maximizing rate of insisting on a bribe In Mexico , particularly before the democratization in 2000, .
Speaker 1Party loyalty was reinforced by corruption . Bureaucrats got very low formal salaries but were tacitly permitted , even encouraged , to extract informal rents . So this created what the political scientist Guillermo O'Donnell called a brown area , weakly institutionalized and yet self-reinforcing . They evolved rules , even formal prices . So even if reformers want change , ordinary citizens may distrust it . If people expect that nothing gets done without a bribe , they're going to keep paying because they want the system to work and the fact that the system might be otherwise is very hard for them to imagine .
Speaker 1The US really ran into this problem in Afghanistan . The US authorities described citizens who routinely paid bribes to police or judges . As one Afghan put it in an interview if you don't pay , you don't get your rights . Everybody knows this . Reform then stalls because both citizens and officials
assume corruption is permanent . If an official tries not to take bribes , people will basically insist you're not going to get caught . So bribery and corruption can be locked in . Because officials treat offices as sources of income , citizens expect to pay bribes and plan accordingly . Low state salaries make corruption functional to survival , and reform coalitions are weak compared to beneficiaries of corruption . So that actually is exactly North's point . Bad institutions persist because they create feedback loops that reinforce themselves . Breaking those loops usually requires either massive shocks , an economic crisis or a war , or some kind of external enforcement , maybe conditionality on joining the EU or , in the case of Singapore , a massive government crackdown that involved direct corporal punishment . If bureaucrats were found accepting bribe , they would be whipped in the public square .
Speaker 1Let me say a little bit more about Nigeria and Richard Joseph . Nigeria's oil wealth had produced a rentier system where political office itself was the main prize , because that meant you got to give out the benefits that were pouring into government coffers from selling oil . Richard Joseph's term , prebendalism , describes how officials regarded their positions then as prebends , a source of personal rents to be distributed among kin or ethnic supporters . Political positions are then seen not as responsibilities for serving the public good , but as prebends sources of income and benefits for the officeholder and their network . Now , because Nigeria is highly diverse , with deep ethnic and regional cleavages , prebendalism often takes the form of distributing state resources along ethnic or regional lines . Politicians use office to enrich themselves , their family and their ethnic community . That practice became normalized so that citizens expect the officeholders to eat from the state , and since they have so much to eat , they should share with their friends , supporters and family . It's not seen as an aberration , but it's actually part of the logic of politics . So when people from the West object , nigerians thought they were just crazy . The consequence is that prebendalism undermines meritocracy , encourages rent-seeking and locks societies into cycles of corruption and instability . It also helps explain why Nigeria's oil wealth has fueled patronage networks instead of broad-based development .
Speaker 1Nigeria has taken in a gigantic amount of money over the decades from selling oil , but there's been relatively little . There's been some Nigeria's done better than many countries , but relatively little broad-based economic development and prosperity . The reason is that oil rents created easy money , making corruption more lucrative than building a tax system as a way of sourcing government revenue . That is , rather than the money going into the private sector and then collecting taxes , the state just took the money itself . Ethnic and regional groups saw office as their turn at the spoils , so anti-corruption efforts appeared like favoritism . You're preventing me from getting what all the previous office holders have got . Why do you hate me ? Citizens expecting corruption routinely offered bribes to access electricity , water , even police protection . It was very hard to resist when people are constantly offering you bribes . International oil prices will occasionally crash and then there's some reform talk , but the reforms rarely last . The state lacks any kind of incentive to build transparent taxation system , since oil revenues and bribes around oil licensing were easier to extract and took less work and , frankly , they were safer .
Speaker 1After the collapse of the Soviet Union in the 1990s , state salaries plummeted , especially in real terms , controlling for inflation and the way you should think about inflation is a little bit different . There . It isn't so much monetary . Inflation is a dramatic increase from the artificially low prices of rent and food under socialism , where those things were kept at a very low price but then rationed and all that happened was that prices went to their market level , but the salaries of government officials did not go up anywhere close to a commensurate amount . Bribes then became a survival mechanism . Customs officers , police and teachers often went unpaid for months or a year . A Moscow journalist noted Customs officer officially earns $10 a month , but the position is worth thousands in bribes . The office , not the wage , became the commodity , so bribe income far exceeded official salaries , making reform akin to a gigantic pay cut .
Speaker 1Political elites relied on bribery networks to fund campaigns and secure loyalty . The money went down , but they expected it to come back , because you were supposed to support your political patrons . Citizens adapted by budgeting bribes into everyday life . It became part of the price they expected to pay for passports , hospital care , university admission , obtaining a driver's license , getting a building permit , almost every aspect of life . Now there were some reforms under Putin . There were wage increases , for officials especially , but they're in a way playing the Nigeria game . So they went from having a distorted system under socialism to depending for their revenue on being able to have money that comes in from oil and gas . So there was some reduction of petty corruption , but high-level state capture became , if anything , more entrenched , and the cycle has continued , now at a different scale and at a different level , as top-level corruption is the most important aspect of corruption in Russia .
Speaker 1Well , the takeaway is that bribery and corruption are not just bad habits . They're often locked in equilibria . Officials count on them as income , citizens treat them as routine . Politicians rely on them for survival . Douglas North's insight is that bad institutions persist precisely because they serve the interests of powerful actors and also because the rules of the game have become self-reinforcing
. Whoa , that sound means it's time for the twedge .
Speaker 1A California legislator was visiting a friend in Chicago . His friend was an Illinois legislator and he took him for a tour . The Illinois Paul stopped the car by a train station and said you see this real line . I got $55 million appropriated , but it only cost $47 million to build . I tell you that's a handy profit for me and my supporters . $8 million skimmed off the top . The Californian pretended to be impressed . Later , the Illinois Paul visited his California friend and the Californian drove him around , stopping the car by an empty concrete slab . The Californian said you see this rail line Illinois guy looked around and said well no , there's no rail line . In fact , nothing is built here at all . The California Paul said exactly we got 1.2 billion to build a railroad line and we stole all of it . You're an amateur Chicago boy .
Speaker 1This week's letter is from MF . Dear Dr Mumber , I believe I stumbled across something interesting , but I leave it to the knower of important things to make that final determination . Something almost every transaction cost has is well , a cost , and by cost I mean a net cost on society . In your latest episode you referenced putting credit cards in ice as a way to self-impose a transaction cost to help a spendthrift stay out of debt . Another example could be a dieter locking away snacks or only keeping healthy food in the house . In these instances the transaction cost is likely a benefit to society .
Speaker 1Then it dawned on me Puzzles . Puzzle is an instance where the transaction cost is in fact literally the point . Not just a deterrence of some other behavior , but the cost itself is the thing being sought . It's also true of games and exercise . In these instances we might call these transaction costs benefits . Granted , there's the opportunity cost of your time , along with the risk of frustration or injury . That means those aren't literally costless activities , but they seem to be in a category of their own .
Speaker 1What I can't seem to think of is an example of this sort of thing in the economy . Seems like every example I can think of where transactions costs have a net benefit to society have one thing in common they're all self-imposed . Am I onto something here ? Can you think of any transaction benefits in the economy that are not self-imposed ? Thank you , mf . End of letter . Well , that's an interesting question and I'm going to take it up next time . And I'm going to take it up next time we do the interview . I'm going to talk some more about this as an answer to that letter . I thought I would see if anybody has any responses in letters of their own in the meantime .
Speaker 1This week there's two Book of the Weeks . One is by Johann Norberg . The title is Peak Human what can we learn from the rise and fall of golden ages ? It's a terrific book that looks at the fact that human societies seem to have a cycle . Now they're not actually cyclic because there's no shared periodicity , but there do seem to be a set of conditions which start and represent the ability to grow , and then a set of conditions that seem to happen along the lines of what Mansur Olson talked about in his book the Rise and Decline of Nations .
Speaker 1Well , johan Norberg does a great job of talking about peak human , and the second book is suggested by listener S Guy , gavriel Kay , a Brightness Long Ago . So the author's last name is Kay K-A-Y . Title of the book is A Brightness Long Ago , the horse race and Il Palio in Siena , and does a nice job of representing the strategies and the work that people go to in order to try to win that race or , just as importantly , to prevent their worst enemies from winning . Well , this is the last of the weekly Tidy Sea episodes for summer . There'll be two episodes each month at least until January one on Wealth of Nations and one interview . The next interview will go up on Tuesday September 9th . The next episode of Adam Smith's Wealth of Nations will be on Tuesday , september 23rd .