How can social scientists address the complexity of the myriad interrelations between economic development, political development, inequality, and human ability to achieve cooperative collective action across groups and populations of individuals from different backgrounds who hold widely divergent positions, interests, and perceptions? This book navigates the difficult terrain between universal-principle, one-size-fits-all frameworks, on the one hand, and approaches that insist that every society is unique, on the other. Using principles of political economy outlined in five core developmental hypotheses, as well as a method for drawing distinctions between basic types of political-economic context, this book constructs a typology that relates distributions of power to specific configurations of institutional systems and social orders. Each component of the typology points to specific types of collective-action problems that condition a society's ability to achieve economic and political development. Policy analysis should pay attention to such contextual influence.

A society's prospects for development depend on its ability to resolve collective-action problems (CAPs). Resolution depends on underlying institutional contexts. Inequality permeates these interactions. This chapter introduces CAPs, institutions, institutional systems, social orders, and political settlements. CAPs arise when individuals, pursuing their own goals, generate undesirable outcomes for some group. First-order CAPs concern forms of free riding; second-order CAPs concern orchestrating the coordination and enforcement that render agreements to limit free riding credible. Discussion proceeds to distinguish informal and formal institutions (norms and rules) from organizations (structured groups of individuals that can take action). Institutional systems are complementary mixes of institutions and organizations, where the latter play critical roles in resolving second-order CAPs. Social orders are large-scale institutional systems. Political settlements are mutual understandings that limit organized violence by addressing broad allocations of authority and benefits.

This chapter augments Chapter 1's foundations with detail on political and economic development, inequality, their interactions, and associated CAPs. Development entails sustained, widespread improvement of economic and political capabilities. Economic development includes steady growth in per capita income, education, health care, and infrastructure, with attention to deprivation, poverty, broader inequities, and associated avenues and barriers to achievement. It also involves creating functional economic institutions. Political development entails steady augmentation of a state's ability to provide public goods and services; protect economic, political, and civil rights; and create and enforce impartial rules (a rule of law). It also involves broad access to political decision making, limiting authority, mobilizing public participation, and enhancing the legitimacy of underlying procedures. Inequality has multiple dimensions (income, wealth, access); achieving equity along one dimension often compromises that for another. Multiple types of inequality are both outcomes of and conditions that shape development. Multiple CAPs ensue.

This chapter addresses the book's first developmental hypothesis and its relations to CAPs that complicate establishing functional governance: Development requires creating social arrangements that deliver key public goods and services and that concurrently mitigate important negative externalities. Externalities are either positive or negative impacts of economic or political interactions on the noninvolved. Negative externalities include pollution and the spread of contagious disease; they arise from activities such as coal-powered electricity generation, crime, lack of sanitation, overuse of natural resources (e.g., deforestation), and excess conflict. Using game-theoretic logic, this chapter develops a few simple models that illustrate the basic CAPs and more detailed models that address how the political and economic incentives of rival coalitions influence the ability and motivation of governments to develop, utilize, and broadly or selectively apply state fiscal and legal capacity.

Development requires both ability and coordination, but the abilities and practices that facilitate coordinating production contribute decisively to inequality. The second hypothesis is introduced: Inherent properties of knowledge transmission, the skill-matching requirements of team production, patterns of social imitation, and production interdependencies generate starkly unequal locational and sectoral agglomerations of production, knowledge acquisition, innovation, and growth. To illustrate these points, this chapter relates individual incentives to invest in acquiring skills and education to these influences. People in areas with high concentrations of knowledge and skill encounter strong incentives to work on acquiring knowledge—and vice versa. Additionally, developing sophisticated production techniques requires a critical mass of suitable firms in order to create viable markets and for skilled labor and sophisticated equipment. Difficult coordination CAPs lead to patterns of unbalanced growth. Finally, rural-to-urban migration often reinforces these locational dynamics.

This chapter develops a social conflict theory of institutions. The third hypothesis posits that unequal distributions of power shape the creation, evolution, and demise of economic and political institutions. A background discussion defines power—a slightly slippery concept—and addresses key sources and manifestations of power. Unequal distributions of power then generate a series of CAPs associated with asymmetric influence on institutional construction and evolution. A flowchart model illustrates. To complicate matters, the fourth hypothesis posits that powerful parties cannot, left to themselves, credibly promise to refrain from using their power for their own future gain—often at the expense of others. Specifically, without institutional and motivational constraint, powerful parties may seize the gains from others' investments in potentially fruitful economic and political activities. Functional development thus requires resolving multiple, largely second-order, CAPs related to credibly restraining powerful actors—when such actors, simultaneously, exert disproportionate influence over institution building.

Development requires institutional change. This chapter suggests a ray of hope. Policy innovations, according to hypothesis 5, can enhance capacities for resolving CAPs, relaxing political impediments to development—notably, CAPs from hypotheses 3 and 4. South Korea's 1950s land reform policy established foundations for subsequent development. Innovations, however, emerge and spread within political contexts; institutional change presents formidable CAPs. Distinct individual as opposed to organizational capacities for information processing, combined with asymmetric distributions of power, typically generate relatively long periods of institutional and policy stability that occasionally succumb to rapid change: punctuated equilibria. Within such contexts, coalitions vie for influence, using policy narratives and images (mini ideologies) to legitimate their influence and discredit opponents.

This chapter summarizes several approaches to categorizing social orders and political settlements on the basis of elemental political and institutional characteristics. A political settlement is a mutual understanding, held among parties with power, that they will primarily rely on politics rather than violence to resolve disputes. Discussion opens with a one-dimensional mapping of social orders, based on institutional strength and access—ranging from a chaos order through three types of limited-access orders to an open-access order. Societies can move in either direction. Next, a two-dimensional approach shows four combinations of institutional strength and competitive or dominant political settlements. A third approach offers three typologies. The first relates political settlements to institutional strength. The second denotes alternative distributions of power between included and excluded groups, and such distributions within included groups. The third addresses business power and capabilities.

Political settlements underlie institutional construction and thus a society's prospects for development. Without some mutually understood method for settling major disputes through politics rather than organized violence, institutions cannot resolve CAPs that impede development. This chapter develops my approach to categorizing political settlements. It offers a framework that permits systematic inquiry into relationships between distributions of power, institutional evolution, and prospects for resolving a series of context-specific CAPs of achieving economic and political development. Political settlements differ fundamentally according to their social foundations—which groups are party to the settlement—and their configuration of authority among insider elites. A four-quadrant typology distinguishes between broad and narrow social foundations and coherent (unipolar) versus disorganized (multipolar) configurations of authority. Additionally, the presence of resource constraints and mutually understood threats to elite political survival conditions motivations to create institutions.

This chapter extends Chapter 8's political settlement framework by addressing business-state interactions operating within specific types of settlements. Three levels of interaction follow. At the macro level, political settlements shape such interactions. At an intermediate (meso) level, market configurations—that is, their degrees of competitiveness and domestic versus export orientation—affect the demands businesses place on the state. These dynamics influence the accessibility (openness) of micro-level exchange agreements (deals) as well as their credibility—specifically, the degree to which they are ordered, meaning honored and predictable, or disordered. A shift from disordered to ordered deals reflects resolution of second-order CAPs of enforcing agreements. Such a shift can prompt growth accelerations that facilitate escaping poverty traps. More substantial development, however, requires addressing Chapter 4's complex coordination CAPs.

Development entails sustained enhancement of economic and political capabilities across a society's members and groups. This text presents a conceptual framework, fully developed in Chapters 8 and 9, that addresses the social scientist's dilemma concerning how to approach systematic inquiry into the myriad complexities of political-economic development. To address pertinent contexts, this framework systematically addresses interactions between asymmetric distributions of power and institutional evolution. It relates distinct types of political settlements to distinct sets of developmental CAPs that shape development. Related inquiry can then focus on how principles from the five core hypotheses operate in specific political-economic contexts. Such analysis can uncover how specific types of policy innovations relate to prospects for successful adoption within specific contexts. This framework can also underlie broad research programs with many theoretical and modeling extensions, as well as multiple testable empirical hypotheses.