Economics and Conflict: the Dark Side of Self-interest and Its Governance as Economic Activities

Con‡ict and appropriation are costly activities that are economically signi…cant, yet the assumption of perfect and costless enforcement of property rights in much of economic research has limited their systematic study. Con‡ict follows directly from the methodological principle of self-interest and taking it into account in modeling leads to very di¤erent …ndings than in its absence: in straightforward extensions of basic models of exchange, compensation is inversely related to marginal productivity; prices depend on relative power, as well as on preferences and endowments; exchange itself can be foreclosed by enforcement costs; the costs of security critically depend on governance and norms of behavior; wage subsidies, land reform and other seemingly ine¢ cient arrangements can be rationalized as appropriate policies in second-best settings; and comparative advantage is distorted in the presence of con‡ict. Overall, in the presence of con‡ict and appropriation Nirvana or …rst-best models are not empirically plausible. Aspects of modern governance like checks and balances and the bureaucratic form of organization can partly be thought of as restraining con‡ict and appropriation. These restraints are better than the typical governance alternative, which is personalized, proprietary governance which typically involves autocratic, amateurish, and corrupt rule.