3. A. (fians,), University of latal, Durban (Sooth Ifrica), 19t'J

9, A,, Simon Prascr Wniversit~, 39-91

@ lnton David Lowenberg 1999

All rights reserved, This work may not be reproduced in whole or in part, by photocopy or other eeans, without peraission of the author, Name : Anton David Lowerherg

Degree : Doctor of Phil.osop1ry

Title of Thesis: Towards an Economic T1icor.y of the Apartheid State

Examining Committee :

Chairman : Clyde G. Reed

ohas E. ~urkhpdin~ ni or Suuerv i sor

---- ' JOGF. Chant

Ga1.y M . Walton External Examiner Dean, GraduaCe School of Administration IJniversi-ty ol California at Davis

DaLc Approved : PARTIAL COPYRIGHT LICENSE

I hereby grant to Simon Fraser University the right to lend my thesis, project or extended essay (the title of which is shown below) to users of the Simon Fraser University Library, and to make partial or single copies only for such users or in response to a request from the library of any other university, or other educational Institution, on its own behalf or for one of its users. I further agree that permission for multiple copying of this work for scholarly purposes may be granted by me or the Dean of Graduate Studies. It is understood that copying or pub1 ication of this work for financial gain shall not be allowed without my written permission.

T itl e of Thes i s/Project/Extended Essay

Towards an Economic Theory of the AparLheid State

Author: Y m (signature)

(date) I BSTRILCT

The use of economic tools to explain the ersrqence or evolution of social and politicaZ institutions has received new impetus and direction ?luring the past two deca3es as a result of the ewetgence of Coasian microeconoaics together with its accoapaaying theory oE property tights allocation and the rate of transactions costs, This thesis begins by identifying aethodological in3iviaualisre and a price theoretic orientation as characteristic features of the neoclassical econoaic approach to institutional change, The "newn econamic history, aodern public choice theory and scanoaic theories of the state all have in cosmn 3 concern with expfaininq the collective choice of institutions as an outcoBe of individual ntility waximizinq behaviout, Several Oif f eren t approaches to this problem arc discussed, with a view to developing an econoeic theory of the

South African apartheid polity,

Rost existing analyses of apartheid have taken the institutional structure as given and have proceeded ta

3entonstrate the (inef Eicient) alfocative and f inequitable) distributional effects of the s~stes,Apartheid is typically portrayed as an irrational response to a racist social environnent, The purpose of this stu3g, however, is to show %ow apartheid institutions may be treated as an endogenous pro3uct of rational individual choice, si~ptsgeneral equilibriu~ ao3el oE the South african econowy is aug~entedby a predatory theory of the state, in which a ruling group selects the level

iii of enfosceaent of apartheid policy, The latter is shown to depend. upon the costs of adqinisteriag, policing and defenatns the institutional syste~, in the face of hath internal an.! external politicaf opposition, as well as upon other exogenous variables such as the jol4 price an3 the occnpational structnta of the white electorate, The model yields testable qualitative predictions, although scascity of qata and proble~s of identification and specification search renaer testinq diff icuf t, never theless it is shown how the dimensions and leterjrtstinants of apartheid enforcement can Be areasursd, and soae preliminary quantitative analysis is unaertaken, 9e tailei! descriptions of the data, formal derivation of the aodel, snl the legislative an? institutional instruments of apartheid, are dealt with in appendices, To uiy parents and to Bart, ACKIQ#LEDGBI!lEITS

I would like to thank Professors Tho~asBorcherding and Stephen

Eastaa for thoir invalu8ble coassnts, suggestions and support throughout all stages oE this work, fn a43ition, Y profited from helpful discussioa with several other mesbers of the Xconosics

Depart~entat Simon Fraser University, of which special aention should be aade of Professors John Chant and Cly3e 6ee4.

Particular thanks are due to Ben Heijdra uho, as both friend an3 fellow student, Mas generous in extendinq to llte the benefits of his sound advice and expertise, especially in the areas of fornal aodslinq and econoatetric taetho.lolagp, &Ian Williaes 31~0 contributed to many fruitful aiscussfans dnrinq the fot~ative period of @y ideas, Any reaaining errors are attributable safely to the author, (1-3) Coasian nicroeconooics: the Theory of Propert 7 Riahts and Transactions Costs ,,,,.,,,,...,,..,,,ss9 f 7-4) The Econosic Theory of Ffon-Varket. Behaviour .. ., 19 IT, ECOWOflIC APPROBCHES TO 83STORY, BQLITXCS W#D THE STATE .****..*.**,8*r*,,*****~.**oo~**~~**************~~

{2,1) The leoclassical Theory of Tnstitutionaf Change an? the *T#av* Economic westory ,,, ,,,,,, ,,,23

(2-2) Econofnic Theories of Politics ant? the Stats ,,,,36

(2,2,4) Property Rights, Contract Theories, and Interest Group Theories of the State ,,,,,.,,,,,,,54

(3,2) Sociological and Psychalogical approaches to Racial Prejudice and Xparthei.9 Tdeoloqy ...,,,.,,,8n (3,3) ~CO~OR\~GAppitaachea to the Explanation of Bace Discrimination an4 Apartheid ,.,,,, ,,,,,,,,.,,,, .,97 [3,3,?) A Critical Survey sf Rcanomic Theories of Race Discrisination ...... ,,, .,.,,. ,,.,,. ..a,e R?

f3.1) The Rationality of Apartheid Tnstitutions .. , ,,I97

(4,3) Imp1ica tions an3 Predictions of the Yodel .. . , ,155

(5.8) Conclusions and Rvenues for Further Research ., 1130

RPPENDTX 1: The New Econa~icRistory .,. ., ,,,, ,, ,. .. . ,,. .. . ., 19Q

(A2.1) Geolr~raphical Separation ['Grand ilp;lrtheid8) ,,705 (A2.2) Apartheid in the tabour Rarket ,,,,,.. ,.,, ., ..209

APPEMDIX 0: Definition an3 Description of the Data Used in

LIST 02' TABLES

5-2 Regression Results - Ccrporate Taxes ,,, ,, , ,, ., ,, ,, , . 175 5.3 Regression Results - Labour Force Teasures of apartheid ,,,,,8,,,,,,,08,,,,....,r..~~t,.I.,,,,a 177 Weoclassical economics is often accused by its detractors of failing to provide an explanation of the processes of cha~qe in social institutions, ?lore specifically, it is characterize3 as wahistorics2n, Thus Runt and Schuattz criticize neoclassicaP econowists for their unquestioning acceptance of the existinq socio-econo~ic institutional structure and for displaying a total lack of historical perspective (7972, p. 8). Xn neoc'lassical rso*Iels, the-individual decision raaker responds with dispassionate rationality to changes in his social and ecancr%ic environaent which, in turn, is regard& as exogcnouslp deteraiined. In Veblen's words:

(This) conception of msn is that of a lightning calculator of pleasures and pains, who oscillates like a hoinogeneous globule of desire or happiness under the ispulse of slianli that shift hia aboat the area but leave hia intact, He has neither antecedent nor consequent (Hunt and Schwartz, 1372, p. 11). Critics - whether institutianalists or narxists - chis that initial endou~ents of wealth and political power, laws, conventions and nrules of the gamew ate not subject to explanation, According to #elf, the purpose of neoclassical theory is to preaict the consequences of waximizing behaviour, But the institutional circuastances in which this behaviaut takes place - what Yarxists refer Lo as the nsocial relations of productionu - are taken Eor granted (7979, p, 831, Thus neoclassical ecsno~icshas nothing to say about how different distributions of wealth come about an3 how different distributions mag be associated vith different types of econoqic systews, In addition, neoclassical sodels "cannot describe the evolution and 3evelopaent of the institution of pr ivatc prbpertyt8 (Nsll, 1979, p. 79). Instead they are preoccupied uith the efficient allocation of resources and ignore such issues a% the effect of alternative distributions of power in society,

This view derives directly fro@ Farx" critique of cXassica3. political econoay:

Political econosy starts vith the fact of private property, but it does not explain it to us, ft expresses in general, abstract foraulas the ------material process through vhich private property actus117 passes, and these foraulas it then takes for l..!~. Zt does not gggphd~cg these laws, i,e, it sacs not de~anstratehow they arise from the very nature of private praFettp, Political econoap,,, takes for granted what it is suppose3 to explainw (rlarx, 9972, pp, 101-102).

This alleged abstraction from unaerlying social and politicwl institutions wakes neoclassical theory into an historically relative set of hypotheses, and thus snpposc3ly imparts a sttonq ideological bias in favour oE existing institutions (Eaeek, 1967,

But Barxists have not been the only critics to indict economics of 3 certain vacuity, Alaerican institutional thought, itself an offshoot of the Ger~anhistorical school and directfp descendeddroa the nark of Vsklan, is characterized by a thorough dissatisfaction with formal neoclassical price t he~ry and a nislrust of sfwplifying mo3els of hunan behaoiour {Kitch,

1983, pp, 169-1 78). Snstitulionalists such as John Coasons,

3iesLey nitchell, John H, Clark, Bcxford Tugwell an3 Gardiner mans are units? in tbhr view of orthodox neoclassical econoaics as "a type of scientific thought which gives too such attention to the shape or fora of its theorizing, an3 not enouqh consideration to the content of that theorizing and its relation to the real facts of econoric lifen {Gruchy, 19f17, p. 23). The cotAnton intellectual orientation which dift4.ngaishes the American institutional school a be desctibed as a belief in the holistic, evolutionary nature of the econonic systea, ffolistic economics, according to Gruchy, abandons the particularistic individnalis~of neocZassica1 theory and replaces it with 3 conception of the indivi3ual as a social being whose behavinur is largely collective and habitual, Econoaic society is treated as a "connected systeau 06 cultural patterns - a sort of cultural force-field - which is in a constant state of flux, The institutional sconoaist rejects the notion of a *f undaiaental, pre-existing h3raony of interestsw and the fiction of a static, competitive econoaic society, both of vhich are a ttributed to neoclassical tbought. He also adopts a social psychology in which the indiviiiuaf is conditioned by the ongoing social and cultural system that surronnds hian3 hunan bchnviaur is guided by an "exploratory or exgerfmntal intelligencem rather than a rational calculus of utility maxi~izatfon {Gtachy, 1947, pp, 558-564). It is doubtful, however, whether the institutional or holistic school of econoaics has contsibnted ~uchbeyand a negative critique of the farmalise and abstraction of neocfassicaf aodel-building, and has offered nothtnq in its place except 3 vague comaitnent Lo quantitative description

[Kitch, 1983, pp, 170- 1721,

Ttta raodern institutional sconoaist Andrew Schotter (1951)

~aintains that orthodox neocXassical economics Is "an institationally limited ac3.ancea: the only social or econoaic institutions that exist are warkets of the cospetitive type in which all agents act pataaetrically and in isolation, This lack of institutional aetail is regarded by Schotter as a serious weakness In the theory, In a tone xeainiscent of Veklen,

Schotter writes that the lack of a theory of institutions:

robs the sodel of any behavioral or strategic coztiplexity or interest, The neoclassical agents are bores who nerely calculate optiaal actfvities at fixed parametric prices, They are liaited to one an? only one type of behawior - that of actfnq as autoaota in response to the (Malrasian) auctioneer, #o syndicates or coalitions are forsed, no cheating or lying is done, no threats are aade - merely truthfa1 parametric behavior (Schotter, 1981, p, 150),

However, we will atteapt to show in this chapter and the next that this type of ctiticisa involves a very narrow conception of neoclassical theory, an3 also ignores a large body of appf ied microeccnonies as well as econo~ichistory which has

3ppeared with increasing frequency over the past two deca3es,

Specifically, we will indicate how the fun4n~ental methodoloqy of neoclassical economics has been use4 to explain both existing social and political institutions and the evolution of these bst itutions over tiae. The scope of these applications has been liaited neither to any particular historical epoch nor to any one class of phenomena, Xt will be seen that history an? institutions 30 not necessarily fall outside the ambit of explanatory interest, and that it is possible to dispel many of the veaknesses which have been attributed to neoclassical econosics as a putative theory of social interaction,

The extension of the scope of econoalcs which has occurre3 in recent decades has been maae possible by a nu~berof relatea dicsve2op1nlents, We aap identify one of these as the work of Ronald

Coase and his followers in the economics of market externalities and property rights, This, in turn, qave rise to tva distinct streams of research: one in the area of economic history and the other in what is traditionally known as "public choice*. In both cases it kecaae possible to talk about the relative efficiency of institutional f0m8 and the reasons for their emergence ar change, A secon3 major departure which facilitated subsequent niziiperialisticH intrusioas of econosic analpsis into the preserves of other social sciences was the a~plication of neoclassical ~etho3ologpto the study af politics and the state, Finally, or more precisely ~qri p~g2with these develop~ents, was the renewed insistence by Stiqler and Becker that the neoclassical method could be used quite fruitfully to explain phenanena which previouslp had been regaraed as explicitly nnon-econo~icn, Coase hiaself attributes the success sf econoi8ists in extending the scope of their interests beyon3 the tradition31 subject matter of economics to the "generalityg* of the for~al., technical methods which have become increasingly characteristic of econaeic analysis an3 which are readily applicable to 33.1 social systems (1978, p, 207).

The rewainifer of this chapter will be 4ettate3 ta a discussion of those methodological features of ~oRern neoclassical theory which facilitate its extension into an econoaic theory 09 social and political institutions and institutional change, In the next chapter we will review the economic literature on iastitutional change, history and politics in order to provide a basis fat constrncting a neoclassical node1 of the South African polity in chapter 4,

ALZl ZIs En~s~hs4eG~3 Recording to Robert SeLdaan, the simpXest and most qaneral model of aankind one of an agqregate of people exercizina

~&?ticgs while influenced by certain cansttaints aria incentivest*

1397 3, p, 569). The fun3anental behaoioural pte~iseupon which neoclassical econosics is grounded is the pro~osition that individuals act so as to put~osefullymaximize their expected utility subject to constraints, given stable preferences

(Beckec, 1975, p, 282; alchian, 1977, p, 139). Tn other words, any observed change in behaviour is assumed to he induced 923 bg a change in tastes but by a change in objective constraints, This is not because the neoclassical theorist has an7 2 EEL~E~ grounds for believing that changes in tastes do not occur or are unimportant deterainants oE behaviont, Rather ft is due to the fact that he is able to observe an3 account for chanqes in objective constraints whereas he is not e~uippedwith the tools to do the sage for subjective preferences, a theory of constrained utility ~axisization with fixed preferences constitutes a potentially operational ~odelof huaan behaviour,

(Becker, 1976, p, 1331, Bs Becker paints oat:

The assu~ptionof stable preferences proviaes a stable foundation for generating predictions about responses to various changes, an3 prevents the analpst ftow succuwbinq to the temptation sf si~plypostulatinq the required shift in preferences to wexp2ain** all apparent contradictions to his predictions (3975, p, 51, The use of relative price and income constraints as ths determining variables which drive behariotal responses has the effect of producing testable proposf tions, This is because 321 changes in behaviour are then explained by changes in prices and iaco~es,which ?re precisely the variables that organize an4 give power to economic analysis (~tigleran3 Recker, 7977, p,

The sethod of neoclassical econoaics thus consists of the development of hypotheses about social behaviour from aadels of individual purposive behaviour, According to Boland, indivi3ualisrn*. which aeans that all explanation pr ocesds fro@ an *irreducabZe einimurttw set of exogenous givens, These exogenous vari~bles consrst exclusivelp of natural conditions (e,g. weather, contents of the Universe, otc,) and the psycholog4.cal states of the individual agents, The psychologistic individualisn of neocfassical theory implies that

"everything or every variable which cannot be reduced either to soeeone*~ psyc!mlogical state or to a natural given ~ustbe explained soerewhere in the theorym (Boland, 1982, p, 301, The priaatp unit of analysis is the indivi4~alwho is the agent of choice, and who is assused to behave rationally, That is, the individual chooses aaaong a namber of alternatives Ln a manner which is bath consistent an3 transitli~e, This eethodoloqical individualis@ of neocfassicaZ econonics has been singled out by its critics as the root cause of its alowistic and ahistorical preoccupation with static choice problems and its consequent failure to account for the underlyinq institutions which must condition any choice, While it is true that the economic wetbod is *atosisticn, in the sense that it Ebcnses attention on the indivijual as the unit of analysis, we vfll see that this dues not preclude the possibility of an econosic theory of institutional change,

The principle of substitution, which 2s the kasic theorem of neoclassical econoaics, emrges de4uctioely fro@ the hypothesis that rational in3ividuals ~akechoices in such a way as to ~axiwizea stable ntility function, In other words, if the cost of any one action is reduced telat2ve to the costs of alternative actions, the individual will choose more of the

Zoraer and less of the latter, A mcostmin this sense refers to the best possible opportunity which is Poreqone as a result of selecting one good or activity in preference to all others

[Blchian, J877, p, 303), In fact, Secker has shown that the principle of substitution 30es not reloire rational waximizinq behaviour on the part of individual agents, Wen the assumpkion that people behave in a co~p2etely rando~fashion nil1 not destroy the principle of substitu2ion. This is true because changing prices or incoaes alter the real opportunity sets faced by iadifiduals and so "forceH behaviour ubich in agqtegata is indistinquishabf e f roa ratianality, Rn incoae-compensated increase ia tho price of one cosr~oditp shifts consunption opportunities towards another on average, evert if consuaers behave perversely or iapulsively ft3r;cker, 1362, p, 41, Wavertheless we will retain the stronger assuapZion of rationality (utility aarintizatf on) throughout this essay, in order to daaonstrate th%t it is still possible to account for the existence of certain institutions which have traditionally been classe3 as *itrationahw because of their evident econoaic ineEf iciancy,

the proposition that rational individuals will always seek to exploit any possible gains from exchange, provi3ing that the costs of doi~gSO do not outweigh the benefits, Ronal4 Coase was one of the first to araw attention to the broad applicability and the wide range of implications which 51on from this povetfut theorem, Coase showed that if the market mechanism works without costs of transacting or negotiatinq between patties, then a31 externalities will be eliminated so as to maximize the value of the social product, irrespective of the initial delimitation of property sights (Coase, 1960, p, 8; Densetz, 196Q, p, 12;

Deetsetz, 5966, p, 63). An externality is siaply a harmful or beneficial ef feet which ispLnges upon an econo~icaqent but Ear which he is not co~pensatedor rewarded by mans of a ~atket exchange, In Coaaian teras, the existence of an external it^ implies that there are unexploite4 gains fro@ exchange. Tf the transactions costs involved in exploiting these gains e~ceedthe gains the~selves,then the initial assignsent of property rights ---#ill have an effect on the allocation of resources an? the total value or taix of production (Coase, 39613, p, 16; Delasetz, 3975, p, 163), However, in the absence of transactions costs, the corposition of output is independent of the structure of property rights except insofar as changes in tha 4istributian of wealth affect demand patterns ffutubotn and ~ejovich, '197 2, p, t3Y3),

At this point it is appropriate to digress briefly to some key definitionsl issues, Turubotn an3 Pejovich point out that

"property rights do not refer to relations hetween Ben and thiags but, rather, 22 ppctioneg behaqibt~lmfaraepq ajoqq ---Ben ----that -----arise ----from ---the ------existence of SkAqqq pi3 p~G&g& i&2&1 ---useq"3't972, p, lt39), The central probleraatic for any theory of property rights is to show that the content ad these rights affects the allocation an4 use of resources in specific an? predictable ways, Trade and production involve contractual relationships which exist not so ~uchto accomplish the exchange of goods and services, but to permit the exchange of *bund%esw of rights over those goo3s an? services, These canttactoal arrangements often take the fors of prescriptive rules vhich effectively constrain the decisions an8 behaviour of private individuals, but vhich theaselres may be the prodnct of conscions social choice on the part of legislators or others responsible for the design of statutory regulations (Vining,

1362, pp, 167, t8U). Once the tsrlras of a particular type of transaction are sufficiently entrenched as to constitute a set of accepted rules of behaviour, the specific rights conveyed by those rules becoate themselves objects of transaction between indiriduafs, The value of the exchange depends crucf ally an the nature and extent of the rights which are being traded (Demsetz,

196U, p, If), The right of ownership in an asset consists of the right to use it, to change its form or substance, and the right to (partially or fully) transfer the ownership clairtt itself. hng one or Bore of these co~ponents of a propstty right nay be attennated to some degree, and this obviously affects its saloe,

A private property systen mans that individuals have exclusive control over the use to which scarce resources can be put an3 that this right of control and use is transferable or saleable [Dentsetz, 19566, p. 62). Privltely oun4 resources will always tend to be allocated to their highest valued use, provided that the costs of achieving such an optimal allocation {the costs of trading rights) do not exceeA the gains, 3f transactions costs are sufficiently high, exchange in tights among owners can hsve alhcative effects due to the positive costs of effectinq the exchange (Alchian and Dearsetz, 1973, p, 221,

Recording to De~setz, *a primary function of pro~erty rights is that of quiding incentives to achieve a greater intesnalization of externalitiesn (1967, p, 348), The Pigouvian concept of "externalityw iwplies that there exists some deviation fro3 an attainable optieum due to a diaerqence between private and social costs, The significance of Coasian analysis is that it f~cusesattention specificallp on the transactions costs that prevent indivi3uals from bargaining in such a way as to internalize all the effects of their private activities, and thus serves to de~onstratethat the concept of ne-attetnalityn is purely orn native and has no positive analytical substance

(Dahlaan, 1973). A contract consists of a transfer of property rights in one form or another, These transfers, and the associated coordination oE inputs of various factors of production, are costly events, The choice of a contractuaZ arrangement is aade so as to saxi~izethe gains derived from the contract subject to the transactions casts involved in the process of contracting (Cheung, 1969, pp, 52-64), Transactions costs say be defined as the costs involved in ordering economic activity, and thus include the costs of entering into the act of tra-lling (Bssnet, 1977, p, 289; Breton,

1974, p. 9). If we regar4 an exchange as a productive activtt~ requiring the input of certain resources in a specified technological relationship, then we can simply assume that n

Zixed proportion of whatever is being traded disappears in the course of the transaction itself, Tn other words, we %my forsally treat transactions costs as analogous to transportation costs or any other variable proanction cost, However, in addition to this type of transactbons cost, there sap be fixed setup costs associated with each exchange, and, even sore difficult to aeasure, a vholc range of costs incurred in bringing the trading parties together (search costs), inforrtllnq each other of the existing exchange op~ortunities,and deciiing haw best to exploit these opportunft3.e~ [information and decision costs), The costs of obtaining inforwat ion about the attributes OF traaed coasodities is it.self dependent upon the probless and costs involved in measurement, The detection of seasurereent errors is a necessary and iaportant coepanent of most contractual arrangeaents, Rarzel shows that the existence of positive aeasuretnent costs can prodncs such institutional devices as product warranties, share contracts and brand names, even in the absence of risk aversion on the part of the contracting parties (1982, pp. 32-37), It is also necessary to take into account the actual costs of batgaininq between the parties involved, and then after the trade has been concluded there teaain costs of enforcing, policinq and monitoring the rresultinq contractual. obl iqations (Dahlsan, 1979, p, tOS) ,

Policing or enforcement costs alone are an extremely significant dirasnsion of transactions costs, because enfoscernent is an isiarportant aspect of any property rights spste~ (Alchian, 3977,

The value of what is being traded 4epends crucially on the tights of action over the physical coineodity and on faow econoaically these rights are enforced (Deaasetz, 1964, pe 17).

A property right is nothing sore than the expectation of an individual that his decision about the uses of certain resources will he effective, It follows that ownership rights ta property can exist only as long as other people aqree to respect the@, or as long as the owner can- forcibly exclude those! who do not agree

(gobeck, 1981, pp, 39-39). All property rights are therefore ulti~atelybase4 on the ability of' individuals or groups to aaintain exclusivity, The enforceaent of rights to particular resources has a vital impact on the ability of prices to measure benefits: the absence of property rights enforcement weans that prices, which reflect private benefits, fail to measure the full social benefits derived fro@ the trade4 qoods, while aanp transactions costs - both the ex ante costs of search, decision and bargaining, an3 the ex post costs af sonitoting, policing and enforcing - say be treated sintply as different categories of information or measurement costs

{Daklman, 1979, p, t48), there are saae types of transactions

1 rr costs which csnnot be conceptually reduced in this manner, This is especially true if there are aspects of bilateral mnopoly an3 Ricardian rents to be divide3 between the negotiatinq parties, In this case there will be components of the costs of bargaininq, as well as the costs a•’ sonitoring the cospliance of contracting parties vith the terms of the contract, which exist over and above the pure costs of information and aeasurement

(Alehian, Craw Eord and Klein, f 979, p, 300) ,a hqaf restraints and prohibitions on the use and exchange of resources can be vieved as effectively imposing infinitely high transactions costs upon that exchange, thus renRerinq it prohibit ivaZy expensive (lurubotn and Pejovich, 1972, p, 3346; alchian an?

Denasetz, 1973, p, 21).

Economic efficiency in exchange requires not only the

EulZilaent of the fasilfar set of aatginal equalities, but 3lso the use of the lowest cost legal technology or configuration of ------property rights (Cracker, 1973, p, ti64). If the expected %Iae grateful to Professor T, E, 3orchetdinq for drawing this to attention, b sinilar point is sa3e bp Posner who contends that a smll nusber of parties to a transaction is no guarantee of low transactions costs when elewents of bilateral raonopolp are present - i,s. if neither party has a good alternative to dealing vith the other, Transactions costs are lfkely to be highest when bilateral aonopoly coinciRes with a large nuwber of parties on both sides {Posner, 1977, p, BS), fn Pact, monopoly power say be pervasive even in the absence of entry restrictions or highly concentrated supply, For exaaple, incentives for post-contract opportunistic behavionr can arise ont of the existence of specialized assets and approprfable qnasi-rents, =There may be sany potential suppliers of a particular asset to a particular user but once the investment in the asset is wade, the asset nay be so specialized to a particular user that aonopoly or monopsony warket pouer, or both, is createdm (ALchian, Cravford and Klein, 1978, p, 2993, benefits froa an exchange of property rights exceed the expecte? transactions costs, it would be possible for the legal or political systea to achieve a Pareto-i~provement in the allocation of resources by assigning property rights in such a way as to place liability on the party most cheaply a3le to avoid the costly interaction {tleltrsetz, 19'75, p, 182). Tn other words, efficiency is served by assigning rights sl n_glo in such a uay as to minisize the costs of transacting that waalii otherwise be incurred sabssquently, This in turn is achieved by assigning new tights initially to those who potentially have the strongest incentive to purchase thes, thus econozoizing on transactions costs,

Perhaps the ~ostsignificant contribution of Coasian property rights theory is the insiqht that, in a world of positive transactions costs, the value OP realigning resources and, more iaportantly, rights over those resources, should equal the costs of transacting, Thus sows external effects, both haraful and beneficial, say still be consistent with econoaic efficiencg {Deasetz, 1968, p, 45 Coasian theory treats positive transactions costs as a reality, and dispenses with the *!?itvan% approach* of pre-Coaslan nelf are ecanowics rhich regaraed the best of all possible (attainable) worlds as one in rhich all externalities Ire fully internalized, ~pprecistfng this fallacy 3s early as 7959, Astow writes:

Any method of resonrca allocatfon requires a process for equating supply and deraand (or some equivalent), and such a process may be in itself costly, though such costs are not considered in the usual formal analysis of welfare aconoinics (Arrow, 1959, p, w),

It is not surprising that the Coasian recoqnition of the role of positive transactions costs and Zha consequent allocative i~plications of alternative property rights structures should provide the foundat ions for an econoaic theory of institutions vithin the neoclassical pmadigr, f n Carl Bahlsanes words:

The Coase approach,,,directs attentioa to the point that institutions fulfil an econowic function by reducinq transaction costs and therefore ought to be treated as variables detsrmined inside the economic scheae of things. The question then altisately becomes: how can the economic organization be i~proveilupon by qq~ilq~enug institutional arrangeaents?.,, gqgi2 peqns iqg dgii 22~ --an ------ecunolrtic ----theolp _of $ns~&inti~~ (Dahlaaan, 1979, pp. 161-162, emphasis added). Cahlssn adaits that, in a general equilibrium sense, this type of approach yields the soaewhat unpalatable conclusion that uif it exists it aust be aptiml, and if it noes not exist it is beca~seit is too costly; so that is owtfmak toon (1979, p,

15'3). However he attributes this to the fact that, as we have seen, Coasian theory renders the concept of an "externalityn totally noriaatiwe. Pre-Coasian welfare econoaists mnintainsa that the existence of an externality or "side-effectn, and the resulting absence of the required equalities of warginal rates of substitution and transformation, necessarily Eapfied that the economy was operating inef f icientlg, 9ut this traditional view failea to take into account that the provision of a market for the side-effect, or some alternativs political mechanism for internalizing the externalit g, is itself a valuable and costly service, Xf this service is not being produced, inequalities between certain aarginal rates of substitution an.? transformation Bay in fact be consistent with efficiency, as will be the case if the cost of taking account of side-effects through either the market or the polity exceeds the value of realigning resource rights (Dejlnisetz, 1964, pp. 13-74), Thus there exist no qualitative differences between nside-effectsn or ex ternalities and "primary effectse, The only df fferences are those implicitly basen on quantitative differences in transactions costs (Ibid,, p, 25). Once transactions costs arc? recognized as relevant constraints in the process of trade; a11 existing side-effects are internalized to a degree that is optiaal by definition, The iaportant point for onr present putpose is that this {almost tautological) property of Coasian theory does not det~act from the crucial role played by ttaasactions costs in detersininq the fora of exfstinq institutional arrangements as well as the types of rules, regulations and decision sechanisas that societies adopt.

Becognition of the i~portancsof positive transactions costs in affecting the allocation of rights over resources is therefore vital to any neoclassical theory of politics or the state

(Breton, 1974, p, 93,

1LQL She !ZEC~?EI% Ihnnsu 2Z !nezhnrkzt Zs92Sn5r The concept of transactibns costs, cosbined with that of utility maxiaixation, has indeea facilitated a neoclassical theory of institutions and institutional change, Stigler and

Becker (3'377) have atteapte3 to show that chanqes in hehavfour which appear to have no rational basis can be explained on the assu~ptionof stable, well-behaved preference functions and that this approach is the wost fruitful in terms of the generality of its applicability and the testable nature of its predictions,

Behaviour vhich otherwise aay be characterize? as irrational, volatile or as detesmined bp culture or tta?ition is given an econo~ic explanation by invoking the analytical device of positive transactions costs, when econosic agents are observed not to exploit all prof itable opportunit3.e~or gains fro^ traas, the utility maximization hypothesis Bay appear st first glance to be violated, However, as we have seen in the previous section, the neoclassical method postnlates the existence of costs (both pecuniary and psychic) of taking advantage of these opportunities vhich Ray be sufficiently large as to eliminate their prof itability altogether,

Becker (1976) agrees with bahl~anthat, by asserting the existence of such transactions costs, the necono~icapproachw to huean behaviour is rendered into an almost tautolagicaflp close? systcr, hny diverqence fros a Pareto-optiaal equilibrium is accounted for by positive transactions costs which make the attain~entof such an eguiZibrive too costly to be profitable,

Becker draws an analogy between the Panqlossian role of transactions costs in the neoclassical pacatligm and the gositinq of (sotttetiiltes nnobscrved) uses of energy which serves to welosew or "coapleteW the energy systea an3 thereby vin?lcate the law of the conservation of energy, The critical question is vhether a system is co~pleted in a useful way; the important theorems derived from the econoaic approach indicate that it has been completed in a way that yields such more than a bundle sf empty tautologies in good part because, ,,the assumption of stable preferences provi3es a foundation far predicting the responses to various changes (Seeker, 1976, p, 7).

Utility, as opposed to wealth, maxiaization is a v%.tal prerequisite for an weconomicm theory of non-market phenasena, and as such, it is utility (not wealth) maxiwization which prowides the basis for what Becker refers to as the "ecano~ic approachn to hursan behaviour, Thus, according to alchian (397?), the proposition that an in4ivi4ual seeks to ~axiwizehis utility siarply weans that he ntakes consistent choices - i,e. that he behaves nrationallym, In order to use this postulate as an analytical tool, ue eust specify the arqusents in the utility function, One of these argneents sap be pecuniary wealth, but the individual shoulld be- able to substitute between this ;~n? othes sources of utility which stay be of a less tangible nature,

The utility waxi%izing neconosic approachm to behavi oural explanation is exemplified in Feckesas so-called "new theory of consumer choice?y, according to which the consuner is viewed as

*producing"f certain non-mar ketable camiaodities {nantishaent, warlath, health, etc.) by co~lbiningpurchased rrracket goods and services with household tine, Xt is these non-aarke table comsodities that provide utility to the consuaer, and chanqes in their relative shadow prices praauce changes in consumer behavioar which wonld not be explicable as anything other then a change in tastes if wealth wa~imizationwere the only criterion of choice (Becker, 1976, p, 136; Stigler and Becker,3977, p, 77) . Sintilarly, Alchian points out that wealth rnaxiarization is not adequate to explain tbe teha~iourof the firm when vievet!

(in the Coasian sense) as an organisattonal device designed to econoeize on various transactions costs (1977, pp, 243-2UQ), T t is the assu~ption of ntifity tnaximizatian, and appropriste construction of individual utility functions, that has facilitated econoaic explanations of such diverse fsnd apparently wirrational*) phenoaena as altrnis~,discrifftinatLon, addiction, fashions and fads, and custo~s and traditions

(Becker, 1975; StigZer and Becker, 1977). According to Posner, the application of the econoaic aethod to explain non-aarket interactions, although recently reoiwcd by the wChicago Schooln, has earlier precedents in the work of Sidgwick andl Eitchell, and the them of this literatare may Justifiably be tegardeR as nothing less than a redefinition of economics as the stndy of rational choice pg 5% (1951, p, 31, In Cease's view, such a broad definition of econo~icsas the stndp of a11 purposeful hutaan behariour has randere3 its boundaries cotersinous with aany "contiguous 4isciplinesw (1978, p, 29'7).

In the next chapter we will see how the tools of neoclassical economics have been ex tended to explain political institutions and institutional change, Chapter 3 will survey the literature on apartheid an3 race discri~ination,and an econunic wonel af the South African apartheid state is ae~elopedin chapter Y, Various eapirical. ireplications of this model are exa~ined in chapter 5, while chapter 6 concludes with an assess~entof the significance of the approach suggested in this thesis far the current literature on South Rfrica, 11, ECOlORIC lPPBObCBES TO HTSTORI, POLITICS ARD THE STlkTE

theory of property rights, together with the Lndividmk aaxitaization hypothesis, to the analysis of contractual f oraas. Constraints which in more traditional models are regarded as exogenous are now effectively en3ogenized. The resubt is 3 characteristicslly m~ge&~Ja~t conception of history, in which enilogenous changes in -social and political institutions are produced by shifts in econoaic and technofogical (or natural) constraints, In a passage that sounas al~ostreminiscent af

Marx, Alfred Conrad contends that:

History passes through hsio fzfe~, an3 the production and transforsat ion of laws, custoas, beliefs, styles of civilization, even the content of conaciausaess - all these are lautua'lly penetrating and fully reciprocal (Fogef an3 Engerman, 197U, vol, 1, p, 34).

Houever, the flarxtst dialectic is essentially an *organicn conception of social change, whereas the eet hodological indiriaualisa of neoclassical econoeics focuses attention upon aarginal variations in institutional fores, induced by chanqes in the objective constraints which impinge upon the individual econoaric agents and thereby drive the entire systent feuchanan and Pulfock, 1965, pp, 318-3354), In fact, 3aland defines an institution precisely as a constraint, the establlshnent of which requires the iaplicit or explicit participation of many individuals, The psychologistic individualism of the neoclassical pet hod (see section 1-21 prescribes that all

What rakes institutional constraints iaportant is that they are not naturally given but have theaselves been created by other individuals acting in concert (Bolanil, 1982, pa 57)

According to Schotter, this approach derives from Venqes*s vZew of institutions as arising out of the selfish interactions of a apriad individual econoaic agents:

Just as A3a~ S~ith~sinvisible hand can, in a decentralized fashion, lead economic agents to reach a Pareto-optiaal caapetitive equilibria&, it can also lea3 them to create social institutions that will facilitate their interaction when competitive aatcaees are not optimal (Schotter, 1931, p, Q),

?konorics is thus effectively redefine3 as *the study of haw iadioidual acanonic agents pussuing their om selfish ends evolve institutions as a rsearls to satisfy theew (Tbid., p, 5).

In sanp naive neoclassical models, the institutional structure is taken as qivan (Ga34herg, 1379, p, 365). In economic explanation of the provenance and change of institutions wust start from an analysis of the 4eter~in3nts of property rights structares and contractual forms, Unaerlging every transaction is soae form of contract, the terms of which specify the 3istribution of incoae amonq participants and the conditions of resource use, Since any transaction inva'rves an outright or partial transfer of property rights which is define3 by a contract, a theory of contracts anst, by its wet? nature, be concerned with the structure, organization, transfer and enforcesent of property rigfits (Borth and Tholslas, 1971, p, 753).

"The contract aay be formal or inforaa'l, expressed or irapli-e?, wittea or unwrittenw (Reed and waderson, 3W3, p, 135), but the isportant point is that, in srner for the contractual farm ta be stable throvgh time, the terms of the contract aust continue to reflect tbe economic value of the resources (ax rights. over resources) transacted through the contract, Any chanqe in the real value of property rights will set up incentives for reoision to existing contracts that in turn will. ulti~ataly be translated into f ally-fledged institutional change,

The indivi3ual econo~ic agent re~ainsthe basic unit of analysis in the sense that it is the in3ividualss purposive aaxi~izing behaviour that mtivates change, The sase aarqina? calculus of costs and benefits applies to institutional or contractual innovation as to Bore faailiar adjust~entsin the behaviour of firms an3 households, In both cases, the hypothesis of individual utility waxiaization is invoked by specifying functional relationships and the relevant shift paraeeters in otder to facilitate testable pr@?2ctions (Anderson and flill,

1975, p, 1653, Thus changes in property rights assignments sre endogenously qetermined bp changes in the ratio of costs to benefits of pact icular property rights specifications (Pe jovich,

1972, pp, 313-314). Pot exaaple, Anderson and 8ill identify the aarginal cost and marg knaf benefit of ?iff crcnt levels of resources devoted by utility nraximitinr~ agents to property rights definition and enforcement activity. The benefit from increasing levels of such activity accrues because of the increased probability of appropriating the full value of the asset or resource in question, This benefit is assumed to increase at a decreasing rate, thus resulting in a downward-sloping marginal benefit schednle, The marginal cost of property rights enforce~ent and definition activity . rises because of the postulated rise in the opportunity costs of the necessary resources. The intersection of these two schedules defines the existing structure of property rights and any paraaekric shifts will induce changes in this structure. Tor instance, a rise in the price of resources, an3 bence in the value of rights to those resources, will also increase the return on resources devoted to the definition and enfotceaent OF those rights, This in turn will cause a rightward shift in the marginal benefit curve. Sieilarly, any increase in the probnbility of loss of an asset (e.9, 4ue to an increased threat of expropriation or theft), will raise the productivity of definition and enforcesent activity. The marginal cost of this activity will shift in accordance with changes in the paraaeters of the relevant production function. 8 technological innovation in the production of enforce~entactivity, or 3 decline in the costs of inputs to enforceaent or 3efinition, will shift the aarginal cost curve in a downward direction (Anderson and Bill, 1975, pp, 166-367).

Victor Col3berg uses n siailar type of aodel to explain the varying amounts of effort that will be applied by atflity rnaxiaizing agents to achieving changes in political institutions through lobbying, persuasion, bribery and other mans of exerting political influence, According to ColRbetg, the optimal level of political actiwitp is attaine-l when the expected aaryinal benefit of the last dollar spent on influencing institutions in any particular area of interest is equal to that

real resource cost of engaging in influsncinq activity will be higher to any one individual or group ff others are siauftaneously atteaptinq to achieve changes in the opposite direction, and this interdependence amonq inaividuals sast be reflected in the specification of the cost and benefit functions, This process results in institntional or contractual adjustments to changes in technolaqy or relative prices which generally yield @ore efficient configurations of property rights, although it is also possible for soae indiviauals to gain at the expense of others (especially if positive transactions costs inhibit bargaining or acquisition of information).

Goldbergfs analysis suggests that auch of the impetus for institutional change derives from rent-seeki ng activity. The teria nrent-seakingt* was first coined by Rnne Ktueger to refer to the response of utif it y eaxinizinq ayeats to prof it opportunities create? by the political systen (Krueger, 1980, p,

52; Buchanan, 1978, p. 13; Kitch, 3997, p, 210f, Legislation. regulation, monopolies, state charters, tariffs, quotas an? taxes all provi3e such prof it opportunities, an3 resources are invested in capturing these profits according to the saae criteria uhich guiae mare traditional forms of investaent (Breton, '1$6zl, p, 376) . Specifically, since individuals invest resources across possible alternatives until the expected returns are equalized, one mould expect the return on resources invested in influencing legislators to be about equal to the return on other types of investment, The resources invested in this tent-seeking activity represent a welfare loss to society considerably in excess of the usual vslfare triangle {Krueger,

3980, p, St; TulZock, t967a; Tullock, 2982, p, 3371, Such *strategic bahaviourm or bargaining does not characterize truly cowpetitive sarket situations, uhich are wholly miwpersonaln in operation (because sf the existence of extremely close substitutes) . Rather, political or socisX bargaining in order to obtain the rents accruing to individuals front the rmlisttibutiva activities of the state has sore in coswon with bilateral monopofy than a coapetitife ~arket, an3 the incentive to invest resources in such srategic behaoiout or rent-seeking is corresponding'lp greater (Buchanan and Tullock, 1965, D. 103). Tn fact, a sizeable proportion of the rents to which access is sought say be dissipated bp the resource costs of rent-seektnq itself, The extent of rant-seeking is a positive function of the size of the potential rent opportunities (guchanan, 1978, p,

I&), For example, interest qtoap activity, measured in terlas of organizational costs, is a direct function of the *tprofitsw expected from the political. process 19uchanan and Tullock, 1955, p, 2861, However, the retarn on resources invested in tent-seeking is usually a *public qoodm, in the sense that it is shared by a large number of beneficiaries, with the result that the attendant free-rider problem map actually inhibit invest~ent in rent-seeking (especially when the number of beneficiaries is so large that bargaining an3 coordination f s extresely costly)

{Olson, 1955, pp, 22-36), It can also prove costly, hoverer, for a firm or an in3ividual to pfdpjn fron contributing towards collective rent-seeking activity, Far example, the scale on which such collective action is pursue3 will probably be reduced if fewer potential haneficiaries participate, Thus, accordinq to

StigZer, the aote diverse an4 asya~etticthe interests of the individual beneficiaries, the Bore likely that the free-riler problea will be overcome an3 the collective action initiated ------.-(1979, pp, 359, 362) .a There can be no dauht that the Ifurtheteore, Becker has shown that the effectiveness of a groupto rent-seeking activities is aainlp deteratned not by its absolute efficiency - eq, its absolute skill at controlling free-tiding - but bp its efficiency relative to that of other groups, In addition, economies of scale are likely to be iapattant at low levels of e~penditurean rent-seeking, an3 since free-tiding is Rore easily control1e3 in smll groups, 3 ao3est increase in the size of a saall qroup would usually nise the aarginal product of its expenditure on tent-seeking because the benefit froa larger scale would exceed the cost from greater free-riding (Becker, 7983, p, 380), rent-seeking which is undertaken does constitute an iaportant determinant of institutional change (3espite the free-ri3et probfea, to which we will return petiodicsl.l.y throughout this chapter), because institutions, contrsctua'l farms an3 "rules of the gageN are theaselves significant sources af economic rents.

As Coldberg points out, i ndioiduals or groups will generally strive to have their affairs governe? by rules that rewar3 the resources with which they are relatively wall endowed, In Goldbetgas words:

why woulj an organization that is actiwelp seeking profits zithin the rules of the game not seek further profits by altering the rules of the gaae as well,,.? (1914, p. 47975-----

The econosic theory of institutional chanqe bas constitute4 a key input into what has co@e to be knavn as the "newm econo~ic history. The other characteristic component of this nner* history is the clioaetrfc revolution - i.e. the application of quantitative methods {especially the systeqatic analysis of statistical data) to historical problems (Fogel and Engeraran, 197 '1, l?l7&). Various theoretical probless and conttoversies associated with the "new* economic history are dealt with in appendix 2, Oe will now focus attention e~clusivelgupon the role of econoaic history as an expsri~entallaboratory for the econosic theory of institutional change.

Without a theory of institutional innovation, "history is liirrited to narration, classification and descri~tion~(Davis and

North, 1970, p. 1321, The %ewa econamiir: historians have therefore devoted themelves to the task of explaining past events an the basis of individual rational behaviour - i,e, coabiniag econasic theory with history {Davis and Worth, 1979, p. 131; Anaerson and Hill, 3375, pa 153). Yost work in this area therefore involves explanation of changes in property rights structures or contractual forms, Ecanasic growth or developwent requires efficient ecanowic organization as a prerequisite. this in turn necessitates the establishment of institutional arsangeaents and property rights that create an incentive to channel individual ecmosic effort into the activities that bring the private rate of return closes to the social rate of return, A discrepancy between private and social benefits or costs occurs whenever property rights are poorly defined or inadequately enforced. Various factors Rap have inhibited the evof ntion of "eff icientm prope rtp riqhts systems at various points in history, For example, the costs of creating and enforcing property rights say have excee?ed the benefits to certain groups or indioi3uals, or the technology necessary to overcoae the f ree-rider pzabfea associated with certain types of collective action sag not have been svailable, Rach of the *neww econo~ichistory is concerned with identffying the relevsnt obstacles to growth or innovation and analyzing the Banner in which they were circulascribed {North an3 Thomas, 1973, pp, 1-9).

fin influential contribution to this literature is Borth an3

Thonas* explanation of the f~edietralmanorial system 11971). They regard such contractnal spstees as tabour-daes as constituting

"secondary institutional arranqeaentsw, which in turn are: located within a broader set of "primary institutional arrangemntsm (the fundamental rules of society), Secon3arp institutional arrangements are constrained by the prsaarp framework, but over a long period of time, a cu~ulativeset of changes can ultimately aaount to a change in priaaacy institutions which voul3 have keen too costly to achieve in one fell swoop (Yotth and Tho~as, 1913, p. fR6). aorth and Thoaas proceed to trace the evolution of ~edievalEuropean property rights, especiarly the system of labour-flues an3 its ultiqate replacement by fixed rent contracts, Tn the early stages of this evolution, they hypothesize that the general absence of any aarket for goods, coisbine? with the existence of a rudi~entary narket for labour, justif iad the sharinp of inpats {labour-ages) as the contractual artanqeaent havinq the lowest transactions costs, Pressure for institutional change was created by a rise in the level of popnlation, which increased the gains frn~ specialization and trade, and consequently resu2ted in the developsent of a goods market, This in turn made it possible to negotiate an3 specify the peasants* consunptdon bundle in manay taras, so that the relative advantage of Eabaur-dues contracts as &?vices for economizing on transactions casts was eliminated

(especially as high monitoring and enfarce~ent casts were associated with such contracts), Rowever, as land becage %ore scarce in the thirteenth century, the trend towards fixed rent contracts was reversed as landlords adjustea to the rise in the real value of Land by choosing to fara it themselves, The decline in the population which began in the fourteenth centuey caused rents to be reduced considerablg as landlords co~peteq for scarce tenant labour, and fife-long leases were gradually substituted for rental contracts, asing the same kind of approach, Beed and Anderson (1973) show that rapid price inflation, beginning in the late twslfth century, together with rising population, cause3 Znglish landlords to abandon the practice of leasing their 4es~esnesan4 to become agricultural entrepreneurs instead, One of the %ost fully devehped theories of institutional change which has been applied to historical explan%tion is that of Davis and Worth (lq?Q). Their mo3el is one of #lagged suppXym, in vhich a chanqe in the potential profits fro@ institutional innovation indnces, after soae delay (or Zag), the innovation of a new arrangewent caaable of capturing those prof its for the innovators, Pressure for institutional innovation could be initiated By any of three types of exogenous events: (if Potential income from a change in institationall structure aap increase 3ue to the eaergence of a new externality, a shift in transactions costs, or the application of a new technology could result in scale economies which produce rents that various indi,viauals or groups Bay attespt to capture, (ii) The costs of organizing ot operating a neu institution could change because of the invention of a new arrangeaeatal technology, or because af a change in the relative prices of factors used as inputs into a new or coapetinq institution, {iii] R IrtqaZ or political change may alter the economic environtnent, thereby makinq it possible for soae group to effect a re3istribution or take a3vantage of an existing external profit opportunity,

Davis an3 Yorth point out that institutions1 innovation can result in a net increase in social pro4uct if, for exasple, there is a reduction in some transactions or iaforwation costs which leads to a Pareto-inprovemnt, However, it could also produce a net transfer of incaw to those who are able to appropriate the rents produced by the new institation, The theory of rent-seeking leads us to expect that these are likely to be the very saae groups of individuals who were instru~ental in bringing about the institutional change in the first place,

Davis and Borth refer to these benef iciasies as *institutional innovatorsW or "prisiarp action groupsw, kt is through therr rent-seeking responses to potential profit opportunities that institutional change is effected, They consiner alternative institutional forms in auch the sase nap as a business firm considers the choice between alternative investments, Only those costs borne bp the primary action group and those revenues accruing to its eembers are relevant to the investment decision.

Transactions costs, and especially the costs of infornation in the face of uncsrtainty, are particularly important inputs into the calculus of the institutional innovators or rent-seekers, As Davis and Horth point out:

fn the absence of an adequate information network faad other things being equal) the discounts that entrepreneurs put on potential income because of the uncertainty ten3 to be higher the further the potential buyer is (either in tilate or space) fron the location of the ttansaction (1970, p, 137)-

If these uncertainty discounts are sufficiently high, the innovation may not take place at 313, Davis and Borthss theory predicts that the lag betveen a perceived profit opportunity an3 the coxtespon3ing innovation will be shorter the greater are the nunbsr of alternative technoZoqies thnt may be borrowed ar wodified, the sore solidly are econoaic fnstftutions base? on the legal and political snrironment, the larger the nunrbar of existing arrangeaents that can provide the basis for further institutional extensions, and the greater and more certain nre the potential returns (Davis and north, 1970, p, 141) ,* --*------*----- ZTke work of Coldberg, as well as that af econoaic historians such as Anderson and Hill, and Davis an3 gotth, may be cbatacterizea as falling un3er the general rubric of wneo-institutionalismw, rhich eschews models based upon the fiction af zero transactions costs and ideal markets, or upon the tautological definition of transactions costs in such a way that all institutions are necessarily "efficient**. Znstead, the neo-institutionalist school focuses directly on transactions costs considerations in an attempt to explain the choice between alternative ao?es of organizing production, an3 interprets institutions and their evolution as arising ftoe attewpts to economize on tcansactions casts. Burrows an? Veljnnovski (798 1) regard the flneo-institutionaXistw sethodology as aicroanalptical, in the sense that it concentrates attention on the details of the environsent in which transactions take place, and it suggests an eapirical approach that requites the collection of data on individual transactions rather than gtuant itative aggregates. "It is therefore process-orientated, dpnaaic, tends to be evolutionary, an3 seeks to identify the principal factors that have been responsible far institutional de~elogsent. Stated sorxtevhat differently it rejects (iaarket) equilibriua analysis and instead places eaphasis on the adaption to disequilibrius, hypothesizing that *inefficiency* gives rise to adaptive efforts to minim%ze costsa {Burrous and Veljanovski, 1981, p, 23). Reo-institutionalist theory uses the concept of efficiency to wean Hprocadural efficiencp* in agjustfng to an uncertain and changing environment, There is no necessary cossit~entto aarket solutions and persuasive economic reasons We vilZ show in chapter Q how econoaic wodels of historical change can provide important insights into our understanding of

the eaergence and evolution of the a~artheid state, Re now

proceed to discuss anothsr iaportant dieension of the econorsic approach to the analysis of institutions - namely, the various

theories of politics and the state that have eaerged aver the past two Becn8es.

122111 QgrnPnztLa! According to platonic realist social philosophy, there exists an objective %ocial goodw defined independently of

in3ividuaf desires, This social good can only be a~prehenaed bp aethods of philosophic inquiry or introspect ion vhich justif p governsent by the elite, secular, reliqious, or some omiscient and beneficent "philosopher-kingn, Xn contrast to this Platonic ideal stands the utilitarian philosophy of Jeremy Bentham which

seeks to ground the social good upon the good of individual~

farrow, 1963, p, 22).

------*------t(coated) may in fact be provided as to why certain activities should be shaltared froa sarket forces, This approach dues not assert that particular institutions or laws are efficient, but only Hattesipts to iaentify the efficiency attributes of various institutional arrangements, an3 to hypathssize that there is a tendency for institutions to evolve to exploit oppottuaities for iwproving the efficienq with which aarket and non-aarkst goals are pursuedm (Burrows and VeljanovskL, 1991, pa 25). The hedonist psychology associate4 with utilitarian philosophy was further used to imply that each individuaIss goad was identical with his desirerii. Hence, the social goo3 was in so@@sense to be a composite of the desires of indivi4uals frbid,, pp. 22-23),

The Platonic conception of the state is essentially *organicm, in the sense that the preferences of in4ividuals are subordinate to the goals of the state as a collective entity (Buchanan snd

Tullock, 1965, p, 11; Sisksnen, 1971, p, 4). Rorever, the neoclassical theory of the state, with its roots in Bentha~fte utilitazianis~,represents a set of hypotheses about social behaviout which are developed f rnm models of individua% purposive behaviour, The choice-theoretic orientation of the neoclassical sethod places the individual agent - whether he be consuser, entrepreneur, politician, citizen or bureaucrat - at the centre of the stage, instead of treating him as a marely passive role-player within an organic sacietp (Ombeck, 1980, n,

4). The ntet!todo'logicaf, Ln4ivf dualism of neoclassical econolaf cs characterizes the behaviouc of the state or collectivity as "the action of in?ividuals when they choose to acco~plishpurposes collectively rather than in4ivid~allp.,,~ {Ruchanan and Tullaclr,

3965, p, 13). according to this approach, it is not per~iissable to sake value judgeaents reqsrdinq the virtues of particular political arrangeeents, since goveraaental and political institutions ace not to be interpreted as 3avices or sechanis~s for finding the independently $*bestmor "optimaln answers to probless that arise (Britnnan and Buchanan, 1980, g, 20). The eanistic concept of the governsent as a unitary economic subject is replaced bp a pluralistic theory in which a set of indivi3ual "suppliersw proauces social qoods Eot a set of individual

*buyersn who value these goods 0x1 their individual. nrerits fBan den Doel, 1979, p. 6).

We Rap trace a direct line of aescent fran classical writers such as Saith, Benthaw, J, S, ?!ill and Rnut Yicksell to the modern theorists of public choice, The unifyinq them that runs throughout this literature is the concern to soaehow reconcile the private goals of utility aaxisizing individuals with the welfare of society as a whole, Political institntians, and particularly the state, are the aediu~through which this reconciliation is achieved, thus, accordinq to Buchanan: In one sense, all of public choice or the econowic theory of politics, say be sumarized as the *discoveryn or "re-discoverym that people should be treated as rational utility aaxiafzers in all of their behavioural capacities 11975, p, 37).

In fact it would be inconsistent to ascribe RselfishH aaximizinq behaviaus to the individual in his aarket transactions and soae other (perhaps altruistic or self-sacrificing) sotivations in his political interactions (Olson, 3965, p, IOI), Therefore, the fundamental assu~ptionunderlying maern public choice theory is that persons who act in aqency roles, as wgovernorsn, ate not basically 3ifferent f roa their fellow citizens, and nethodological consistency requires that the sam behavioral eotivations be attributed to individuals in pnblic and private choices (Brennan and gfuchanan, j980, p, 5). analysis, to sn explanation of the observe3 behaviour sf social groups (parties, interest groups, etc,) and institutions (the state, govern-ntent, legislature, bureaucracies, etc,) , ??any of the classical ecano~ists devoted attention to the task of defining the nptoper"f role of the state, Both Pettp and .Smith provided a list of functions, such as defence, administration of justice, public works, education, poor relief, etc, J, 8, Say approached the modern view that th* state derives its raison daette fros the existence of 3irergenlses between private =xnd social costs, Ofawing on earlier work along these lines by

Storch, Say proposed a list of state fnnctions similar to those of Petty and Saith, and rationalized the* on the grounds that no single individual would have sufficient incentive to pay for these services despite the fact that he obtained benefits fto-nt them (Bauraol, 3965, p, ?83), Tn this respect, he was aheaa of 3,

S, ?!ill who ~otivated a si~ilatset of *Legitiiuatew state functions on the grounds of charity alone, and did not address the probfea of possible differences between social benefits an4 private retnrns {frill, 1977, p, 3ZtS). 5owe Gersan writings of the nineteenth century - notably those of List and Ragner - are compatible with the classics1 English view of the state as an institution justified by the distinction between inaividual and social wants and the carrespanding axtetnalities (t3autno'l, 19155, p, 193), Among the Jesonian ~atginslists,Sidgwickys 2~1941~&l.ff of Political Ecanox contain an alaost perfect statement of the ------a Pigousian divergence between private and social costs (Ibid,, p,

195), As 'early as 1896, Yicksell recognized that public policy is made by politicians who are theaselves aaxi~izinq, goal-oriented individuals pnrticipatinq in a legislative process

(Wicksell, 195Y, p, 79; Buchanan, 1979, p, 4)-

Uicksell was also aware of the inportance of unani~ityas a bsnchmark rule which would ensure that all quvern~ental actions represented genuine Pareto i~proveaents for ax1 persons as aeasursd by the independent preferences of individuals themselves (Van den Dosl, 1979, pp, 73-79), But he abstracted fton the transactions costs and free-rider problems which, in the real world, are usually sufficient to preclude such constitutional arrangesents (Brennan an3 Suchanan, 1980, pp,

6-7). The traditional normative theory of public decision making is ne~@rthel~Ei~base4 upon the value assumptions inherent in the

Pareto criterion, The aost fundamental sf these is the concern with the welfare of all individnals in society rather than with soae organic conception of "the statem. An additional assu~ption underlying Paretian welfare ecanomics is that the indioidual. should be considered the best judge of his own social welfare, which rules out the possibility of Lnter?ependent utility functions.3

while soiuc political econorists uotried aboat haw public order could be maintainen in the face of in4ividual selfishness, a nuaber of aatheaaticians concerned the~scfveswith a different aspect of the interface between indiriaual ~axi~fzingbehaviour and social consensus, thus prowitling another input into the modern economic theory of politics, The work of these mtheaaticians focused upon the prabIe3 of ilevising decision rules for cua%ittees an3 elections which uauld ensure that the will of the aajority prevaileif, Condorcet, writing in the latter half of the eighteenth century, discovered that the candi33te who uins an election map not necessarily be the one who stands highest. on the averaqe of the electors* schedules of preferences, This so-calle9 nroters"araadoxm (or probleat of cyclical wa jorities) arises out of the fact that a ~najoritgtof --*------3flora recently, however, theorists such as Sen, Peacock and Rowley have questioned the cuspatibility of this second proposition with the principles of orthodox liberal philosophy, with which the concept of Pareto optimality claims a strong affinity {Peacock, 1979, pg, 23-28], They argue that the Pareto principle reflects an essential conservatisa which derives directly from the xejectian of the notion that interpersonal welfare coapar isons are possible, There are very few situations in which a reaZlocation of resources ~3.11 hnr~nobody while some benefit, and any social welfare criterion which treats these reallacat ions alone as beneficial necessarily f mplies a preference for the status quo, According to Peacock, a further probfea arises in situations vhere a Pareto i~proveaentwoul? result fraa such actions as the destruction of a ~arketor the preservation of a bureaucracy where a viable market alternatioe is available, both of which are inconsistent with liberal va2ues, Genuine Ziberalisa is cancernea with minfaizing restrictions an individual free do^, which in turn involves opposition to any extension of the size of the public sector at the expense of private sarkets, even at a cast in teras of sacrificed material welfare fpeacock, 3979, p, 26). voters my prefer & to B, B to C ant? C to R, which irnplies that social choices can violate a fundamental canon of rationalitp normally applied to indiwiaual choices - naaelp, the principle sf transitivity (Hardin, 1982, p, $39). Tn other words, when individual preferences are aggregated by mans of voting, the resulting preference orderinq of the group as a whole becomes intransitive (Van den Doel, 3979, p, 79). This finding has been confirned and elaborated by Slack (1953, pp, 56-57) who shows that it Bay not always be possible to select a single candidate [or proposal) that would Best represent the desires of the aajority, An iqportant earlier writer on this topic was the Rev,

C, I, Oodgsan (Lewis Carroll), who drew on the work of

Condorcet, ?3orda, Laplace and Ranson, all of whom attempted to establish a nethod of specifying the aost ndesire?w alternative by imposing aaditional constraints on the choice mechanisn

(Black, 1963, pp, 46, 158, 783, 199).

The most rigorous inadern formlation of the problea is that of Kenneth Arror (1963). fie sets out to construct a procedure for passing from a set of known individual tastes to a pattern of social decision ~akiag. Tn other wor3s he atte~ptsto specify a consistent social welfare function such %hat the choice sa4e by society Pros a given enuironsent depends only an the orderings of individuals among the alternatives in that environ~ent, However, he finds that, abstracting fro% interpersonal. co@parisons of utility, there is no way of ~ovfng fro% individual tastes to social preferences which will be defined for a wide range of sets of individual orderings, without preclu3ing individuals froin choosing certain options or without appointing a "dictatorw (&rrov, 2963, p, 59).

The practical significance of 9rrowts theorem has been questioned by Tullock (196%). lie proposes that each of the characteristics of alternative social states be arranged alonq an axis (either as a continuous variable or as a series sf points), and that each individual be assumed to have some opti~alposition in the resulting dimensional space, If it is further assume3 that the Inilividual*s utility declines as we

~oveaway frog his optiauw in any direction e preferences are nsingle-geakedR) , then it follows that rsa jor ity voting, although it rill not produce a wperfect* answer to the peoble~ of col2ective decision anking, will approxi~atefairly closely

Arrovts criteria for the existence of a democratic social welfare function, especially if there is a large nueber of voters (fu'llock, t967b, pp, 39, 45-49), Purtherraore, it has been shown by Sen (19711) that, although the Arrow impossibility theorem is valid for social welfare functions (which require transitive preferetnce orderings), it does not necessarily bold for *social decision functionsu, which are defined as coXPective choice rules which generate preference relations that are sufficient for the existence of choice functions (and do not depend on transitive orderingsf, Sen therefore shows thaC there are collective choice rules ("social decision functionsn) uhich facilitate the selection of single bast alternatives from a subset of social states and which also satisfy all the

conditions identified by atcow for the existence of consistent

social choice Sased only on individual preferences (Sen, 1979,

p, 48) ,* In general, any set of conaitions imposed on collective

choice rules can be satisfied bp any nu~berof rules, dependinq

on the nature of the conditions the~selves, If we allow that

individuals may be able to reveal, at least partially, the

intensity as well as the ranking of their preferences, the

relevance of Rrtow*o theores to actual pulitical qecision saklnq

is considerably reduced (Auster and Silver, 1979, p, a•˜),

The traditional theory of public finance consists priaarily in a frautevork for rational policy making, which postulates the existence of a benevolent interventionist governsent whose

actions are wotioated only by the need to achieve aesirnble

levels of certain quantifiable econoaic objectives (such as r-lte?

of incom growth, rate of inflation, distribution of incone,

etc,), Ho attespt is aade to offer an explanation as to &2~

policy is in fact con3ncted. This represents the point of departure for sodern public choice theorists, whose more

asbitious concern is to explain how an3 why polic%es are ------*------*The Arrow iapossibilitp theorea remains valid, however, if we iapose an additional restriction on social preferences - namely that if two afternatives, K and Y, are bath best in S1, a subset of S2, then one of thew cannot be best in 52 without the other also being bast in S2 (Sen, 1970, pp, 17, 511, selected in the first place, which in turn involves sn exaaination of the political and bureaucratic processes as explicitly economic phenoaena (Peacock, 7979, pp, Q-7) ,

Rany of the benefits producerf as a result of group activity - whether it be the activity of the state, an interest qroup, a club, or any othe~organization oh individuaZs brought together to achieve 3 common goal - are non-marketable collective goads or public goods. Ro single individual aember of the group can easily be excluded fros en joying these benefits, regardless of the size of the contribution he has made to their attainment,s This wfree-rider*s aspect of collective goods has been explore3 by Olson (t965), who hss shown that the larger the group, the smaller the share of the total benefits accruing to any one individual or subset within the group, and hence the less the like1ihood that utility eaxiaizing sconanic agents will hsve sufficient incentives to get together and ensure that the benefits are in fact produced, Pargaining costs, organizational ------costs, and other types of transactions casts are likely to SXta the abssncs of discriaination on the part of the state in the provision of public goods, the aaount of each public goo4 captured by the median voter depends on the divisibility of the service flow created by that good, The degree of divisibility taay vary depending on the particular category of public supply, and it stay also be possible for a gronp of voters to secure legislation providing services which accrne exclusively to itself os differentially tax oatsiders at higher rates fBarcherding an3 Deacon, 1972, pp, 893, 900), tn addition, Borcherding has pointed out that despite sons? slsaant of jofntness in the consuwption of certain goods, these goods eay still be produced and distributed privately if the property rights to the stream of indivi3ual consumption services are enforcable at zero policing costa or if exclusionary devices c3n be introduced at a sufficiently law cost (3978, p, 112). increase with the size of the group. Thus no large co~bination of rational individuals can support itself without same mselactive incentivew - ie, without proviainq soae sanction or soee attraction distinct from the public good itself (Olson,

1965, pp, 15-76, 47; 1982, p, 33) .a Olson*s work is siwrply a wore rigorous elaboration of the well-known classica2 theorem that, even if any particular collective action siqnificantly increases the velfare of society as a whole, there is no guarantee that self-interested individuals will voluntarily negotiate with one another to iwplelnen t such action (Pickse21,

1964, p. 91). Similarly, Bau~ol(1965) ilevslogs a theory of the state which is essentially an extension of the wexternalitias* or "public godm arguaent, The existence of the state fs necessitated by the fact that npersons in pursuit of their own irtraedfate interests will be led to act In a aranner contrary to the interests of the othersH {Bausol, 1965, p, 180). kf voluntary negotiations and bargaining are too costly refa tive to the private benefits, the coercive aechanisw of the state is

------I------6Uardin (1982) draws attention to the close sireilarities that exist between QZson*s public good problem and the infamous *prisonersq iIilemaa**, Zn a dpnaaic world in which the prisoners* di2em~agame is continuously iterated, however, it is possitle that incentives for cooperation can arise which would be absent in a static f ortaulation of the problela, Cooperative contracting between players Bay take the form of aconventions* which emerge directly out of the coordination of self-interested behaviour, The extent of such contracting is nevertheless constrained by the debilitating effects of large group size (fsardin, 1992, pp. 13, l56), rsqnired in the interests of naximu~social welfa~e.7

The process whereby individual aaximizing bahaviour is transmitted into collective decisions has been subjected to thorough analysis by Buchanan and Tullock (1965), Their purposa is to explakn nhy specific rules for coXlective decision aatlnq

(such as unaninritg, simple majority, etc.) eserqe at the

%riginalm or constitutions1 level of choice, Ruchaaan 3n?

Tullock identify two types of costs which result from interaction bstween individuals, The first of these are *external costs* - the casts that any one individual expects to endure as a result of the actions of others, The larger the nuaber of people who ate required ta agree before collectiv~ action can be undertaken, the lower the external costs, The second category of costs consists of "3ecision costsn, which ate the transactions costs that are incurred in securing agreesent between two or sore people. For any given activity, the rational individual at the tiae of constitutional choice will choose that decision asking rule which winiwizes the present value of external and qscision costs expected to accrue to him. Buchanan and Tullocb*~aodel deronsttates that whether or not certatn activities are collectivize4 or left to pri~atecitizens depends upon the relevant 3ecision rule an? the costs associated with --"------?Tt should be noted, of course, that the wptisoners? dile~ea~ aspect of the public goods problesn may be avoided if responsible behaviour base3 on an "altruistic aotality* is attributed to the participants. Specifically, the prisoners * dilesma is resolve3 if in3ividuals ate assume3 to act in an inherently cooperative fashion (Van den Doel, 1979, pp, 59-60]. that rule, The model also shows that there is no g p~f~~gireason why a decision rule requiring the assent of a simple ~ajoritg should ~axiaize societal welfare, Even a less-than-majority decision rule can producs Pareto-optimal results providing that it is possible for the beneficiaries and the losers ftoa a particular outcome to bargain with each other feither directly by aaking coepensatotp wonep transfers or inaisectly by trading votes on different issues, or wlogrolling*). Bowever, if the transactions costs associated with such political exchange are prohibitive, utility waxiaizing individuals way rationally opt for siaple majority rule at the stage of constitutional choice,

Oncertainty about whether his awn interests will lie on the side of the ~ajorityin the seauence of future choices will lead the individual to prefer rules or constitutions that will seem

"fairH, in the Ravlsian sense, no matter what final position he

Bay occupy on any one issue (Rawls, 9971, 0, 71).

His own self-interest will lead hia to choose rules that will rsaxireize the utility of the indiviaual in a series of collectiva decisions with his awn preferences on the separate issues being sore or less ranilosly distributed (Eluchanan an3 Tullock, 1955,. p, 7Q.a Of course this result will not hold if political power is, fro3 the very outset, solidified into peraanent or quasi-perstanent ------BAccording to Bawls, a principle of justice is mfairwif it is arrived at through free bsrgaininq of rational in3ividuals in a hypothetical "original position of equalityn in which @*noone knows his place in society, his class position or social status, nor does any one know his Partune in the distribution sf natural assets and abilities, his intelfigence, strength, an3 the like,,, The principles of justice are chosen behind a veil of ignorance* (Barls, 1371, p, 12). On the basis of purely economic motivation, individual me~bersof a dominant and superior group (who considered ths~selves to be such and who were in possession of power) vould never rationally choose to adopt constitutional rules giving less fortunately situated individuals a position of equal participation in governtaental processes (Buchanan and Tullock, 1965, p,

80) 0

The theories of political kehaviour which we have 3iscussad up to this paint are essentially "deaand-drivenm in the sense that they focus upon the different ways in which indivi3ual preferences say be aaalgamated to generate collective results

(Buchanan, 1978, p, 10). The g3~g.m of ptablic goads is dsterainea by the behaviour of politicians, political parties an3 bureaucrats, and a nuaber of economists have trie3 to explain their activitias on the basis of the individual maximization h~pothesis; Downs (3957) ooints oat that attetapts to treat the state or government as an endogenous variable are scarce because most ecano@ists have folPoved the classical noriaative tradition of considering the state as a dkstnrbinq influence upon the self-regulating private econaBy, Governments have often been characterized by tra3itional theorists of public choice as depersonalized, frictionless sachines which serve only to carry out the will of the ~njority (Downs, '1957, p, 2'34).

These theorists have usually igno~edthe structure of incentives that aeteruiines the actual behaviour aE the people who sake up the government, an approach which is blatantly inconsistent with the sethodologica l individualism an3 choice-theoretic orientation of neoclassical econoaics: ,,.it is unreasonable for any economist to set forth a whole theory of lyooetnnrent behavfour without treat f ng govern~ent as a pact of the division of labour, i.e, without shoving how the private motives of its titembers influence their actions [llowns, 1947, p, 2?9), Downs thus starts from the proposition that all econonic agents,

including the indiv idnats who coaprise governsen ts, behave

rationally, (The term "rational* refers, of course. to the

processes of action, an4 not to the ends or goals of that

action,) Secondly, Downs agsuaaes that every gavernntsnt aims to

maximize its political support, so that the primary goal OX

politicians Is re-election, Therefore each poXitical party seeks to aaxisize votes, Xt has in fact been shown by Tullock (1957b) that, in such a situation, the choices af politicians rri.21

reflect the preferences of the aedisn voter as long as the

nuaber of voters is large relative to the number ab issues an3 the preferences of the electorate ate sing2e-peaked aver the

issue space, This follows %ran Blackqs well-known proof that, given these conditions, majority rule will facilitate the selection of the optimua of the sedian votar as an equilibriua outcolne {Tutlock, t957ib, pp, 27, 38; Plueller, 1979, pp, 40-Pt).

Hovever, positive transactions costs, and especially infornation costs, can often prevent the adoption of policies which would be optiwal in a welfare sense, Tn4ividual voters do not have auch in3uceeent to procure costly informtion about all the issues upon which they are voting, because the effect of any one pecson*~ vote is quite saall, Thus voters my rationally choose not to be fully informed [Downs, 1957, p, 259). In addition, the arrow (irn)possibility theorem fnrplies that it Bay not, in fact, be possible for political. parties to Identify aptions which are unalabiguouslp pref erred by 322 voters (arrow, 3963; Downs, 1957, p. nQq. Just as Dovns analyzes the behaviour of utility maxf~izinq pol.iticians, so Wiskanan (1969; 397 2) focuses upon the aot ivations of individual utility aaxi~izing bureaucrats, Tha bureaucratSs utility is assumed to be a Function of his salary, perqaisites, reputation, power, ease of Banagegent, etc, - which in turn are assumed to bear a pasitive functional relationship to the total budget of his bureau, fiskanenqs eo3eZ characterizes the bureaucrat as striving to ~axiaizethe size of his budget subject to the constraint that the budget must be at least as great as the minima total cost of suppfying the output expected by the bureauts sponsors, (The bureau effectively exchanges a specific output in return for a specific budget,) niskanen shows that whether it is constrained by the size of its budget relative to its production casts, or by the dextand far its services on the part of politicians, the bureau will generally supply a greater than optiwal level of output relative to that which would be produced bg a competitive inaustry, I! factor surplus or producerst surplns is consequently generated, \ which aeans that those factors of pro3nction e~plaged by the bureau, as vell as the bureaucrats thsaseZves, have an objective interest in the extension of the bureau and will strongty advocate further increases in its output (Biskanen, 1968, p,

303; 1971, p, 69). The ability of the hnreau to create this producersP surplus dcpenas upon the elasticity of demand for its services: the greater the demand elasticity, the closer the bureau approaches the optimal level of output, Following Downs,

Hiskanen assumes that the politicians who are responsible far

the bureaus will recoasen3 programs to the leqislature that

aaxiiaizc their perceptions of the net Benefits accruing to the

median voters in the constituencies they represent, Tn other words, politicians eaxi~ize a utility function the chief argument In which is their expected probability of re-election

[Biskanen, 1971, p, 139).

One of the aost co~prehensive atteapts to integrate the

theory of public goods with a theory of political decision

naking is undertaken by Rlhert Breton (9974; 1979), Re ca~sends Downs for successfully accounting for the chief institutional

eleraents of de~ocraticpolities, Howe.rtex, !?reton points out that

the only constraints on the behaviour of political agents in

DownsB sodel come Ero~coapetition between parties and the costliness of inforlaation, Downst theory *does not incorporate the essential 'conflict-fulls element of joint consumption which

is an integral property of public and non-private goadsm

(Breton, 1974, p, 6). Breton maintain? that the public aspect of goods supplie3 by the state is able to explain aanp features of collective behaviour which Dawns si~plyattributes to positive

inforsation costs /Ibi.i,, p, 205). Tn Bretonfs model, governaents supply public ptrs&gg (rather than qoods and services egg gg), while individual citizens deaand these puficies accor4inq to their tax-prices, Drices of substitutes and complements and their incoaes, Citizens enqage in political activity in order to narrow the qap between the aBounta of particular public policies u?ich are supplies and their desands for these policies, The 3egree of frustration which individuals will feel towards government actions will be a function of the divergence bstveen their tax abligations and the amount and fore of public services which enter into their utility functions, The greater this .3ivetgence, the greater is the incentive far individuals to incus the costs of influencinq the behaviout of governaent (Peacock, 1933, pp, 72-73), The extent of political activity depen3s also on the price of political involve~ent

(lobbying, voting, etc,), Pofiticians are assuacd to adjust the level of supply of public policies in suck a Map as to mximlzc a utility function which depen3s an the probability 06 re-election, subject to the constraints ieposed by the casts of supplying different bundles of public policies and by the nature of the decision rules or constitution of the society, The supnly of policies in turn depends an the interaction ani! bargaining between bnreaucrats and politicians who have independent prsfetence rankings over alternative policy packages, Followinq Riskanen, Breton assuaas that bureaucrats attaapt to naxiaize the size of their budgets, Thus competition is not li~itc?to that which takes place between politicians for votes (as in the case of bowns~odel), Campetition also occurs between politicians and bureaucrats (since politicians qenetally desire 4i.f ferent chsracteristics of public policies than those which

are coveted by bureaucrats), and hetween politicians and

citizens, as the latter attempt to bid down the value or number

of policy char3cteristics desired by politicians (Rreton, 1979,

pp, 60, 62). Breton*s arodel thus cl~selyapproaches a "general. equiXibsiuan analysis of ndeaocratic* political systs~s, Alongside the traditional goads an? factor markets, there exists a wpolitical %arketW* in nhich coapetfng political patties

attempt to achieve or saiatsin Fower by offering policies in exchange for votes, There is also a "policy supplyn ~arketin which bureaucrats offer alternative administrative packages to

proatore the policy airas of politicians, and a npolicy executionw

aarket in which firms and households supply wcoogetatian* with

bureaucratic measures in return for servf ces rendered (Peacock,

3979, p, 9)

&21!!1 Pl2eS2n Risht2~E2GL2ct Zheol.$%?r922 L!E2lest GE?!i!E ------Theories-- of zhe Sgq&g The state is a vital coBponent of any econoaic theory af property riqhts. Furthermore, the property rights approach scans

that our understanding of the state can be developed directly fro@ individual utility saxilaiziag behaeionr (Purubotn an4

Pejovich. 1772, p. IlQO), The tole of the state, or Bore generally the *body politicn, in property rights theory is

twofold: fitst it inust 3ecide upon an initial assiqnment of

property rights aiaong indivi3nals, an9 second, provision sust be sade for adequate protection and enforcement of the assiqne3 rights (Deissetz, 1366, p. 621, The state can therefore be regarded as a firs that produces and sells protection and justice in exchange for compulsorp contributions (taxes) which it exacts from the citizearl (Pejovich, 1972, p, 315; Ruster and

Silver, 1979, pp, 2, 13, The state defines property riqhts throvgh the aedinaa of custo~and law, and rsnfotces thela throuqh its police, judicial and military power, The citizens in their turn pay for this service out of the tents vhich accrue to the@ as a result of the existence of weal speciffa4 and protected property rights, Changes in the structure and asslgnaent of property rights are explained bp changes in the econoaic benefits vhich uanlil be proiluced by a wodificatioa to existkng rights relative to the costs of policinq and enforcing the new stystea of rights [furubotn and Pejovich, 1972, p, 11QQ). The coflective nature of most of the goods and setvives produce3 bp the state as a firs, together: with the scale economies which exist in such activities as protection against external threat, explains the high degree of concentration in the market for

"protection setviccsu, and hcace the selatively la rge size af states (Austet and Silver, 1973, p, ST), This type of analysis throws soae light on the purpose an3 extent to which the ruling group can exert its ~onopalypower to change property riqhts assignments over scarce resources and thereby altar both the allocation of resources and the distribution of income

(Pejovich, 1972, pa 316). The state may or msy not assiqn property rights in such a way as to achieve waxi~usieconaeic cfficiencv. Rccatding to the "contractariann or *'public interestm perception of the state, its purpose is indeed to eabody the optinal social consensus that has eaerged out of saluntisrg agreement (either implicitly or explicitly entered into) among all sesbers of the co@eunfty,

But according to the "interest qroupn or Hpretiatorym theory, the state is essentially an f nstruaent of wealth redistribution, with the politically powerful benefitting at the expense of the po~erless.

The contract approach views the state as a tool to promte efficiency through providing "public goodsw that confer benefits which are not limited to those who pap for thea and hence uoul3 be produced in suboptifsal quantities on pr ivats mr'lre ts (Posnsr,

1981, p, 303). For exaaple, one of these public goods is &he legal systee which, accor3ing to Posnet, sstves as a substitute for woluntary aarket transactions when the Zatter are too castlp to be profitable, Posner straws that a lagal s~steaanchored apon econoaic concepts of efficiency can produce resonree and property sights allocations which closely approximite those that would cmrge in a frictionless zero-transactions costs world of prirrate ~arkets(Posner, t97T, p, 11). Tt is also possible to treat the regulatory activities of qorernsent agencies as n response to the deaann by the public for the correction of inefficient or inequitabls wtarket outcoares {Posner, 1974, p,

3351, The conttactarian view of the state is consistent with Schotter's definition of a social institution:

R social instftution is a regularity in social behavior that is agreed to by all wesbers of society, specifies behavior in specific recurrent situations, and is either self-policed or policed bg soBe external authority fSchotksr, 1981, p, It),

Rost social institutions will require saBe form of policing or enforce~ent, For instance, a sjste~of property rights is a social institution in whsch the Behaoiour of individual agents is circuascribea to canfsra and which defines an agreed-uoon regularity in bshaviour, Boweoer, as Schotter points out; this institution is not in epuilibrius because each person has an incentive to steal fro@ others, As a result, sose external authority {the state) aust be instituted (by universal consent? to enforce these rights jrjchotter, 1981, p, I?).

Contractarian theories of the state are based upon the concept of mutually benef idal trade. Separate individvals are assu~ed to have separate qaals, bath in prfvate and social spheres of action. Tt is through the eechanis~of exchange that these separate individual interests are reconciled, Contract is a device for social cooperation, and the idea of contract has sosetirnes been treated as analogous to that of the invisible hand of the warket [Seidman, 3973, g, 554). The classical contractarian state is a value-neutral, iapartial fraaswark within which bargaining can tate place. It liafts itself to enforcement af the laws an4 conflict resolution, and does not

Becoae involved in the active ordering of society (TbiR,, pp.

555-555). According to aarth {1981), contract theories of the state have been nresutrectedm by ncocZassical econo~ists precisely because they ara 3 logical extension of the theorem of exchange in which the state plays the role of wealth maximizer

Ear society,

contract which lisits each In4ividuaP~s ackivi ty relative to others is an essential precondition for econoaic growth, Tn consequence, the contract theory approach offers an explanation for the development af efficient property riqhts that voal? promote econo~ic growth fYotth, 1981, pp. 4-51.

The first task of a contractarian theory is to explain vhy a particular set of decision making rules - a particular constitutional fraaework - emerges In a given society, The establishaent of these graun3-rules, arrived at through autual agreelssnt, aelns that the asount of effort devotcil to the aaintcnance an3 preservation of the sxistinq allocation of resources can be reduced signiffcantlp, thus sakinq everpone better off, Phxlse savinqs in property riqfits enforcelaent an3 policing casts are essentially the adrantages which accrue by replacing the pre-contract Wobbcsian nwar of every man against every aan* with a 9'ciwil societym {ffobbes, 1946, pp. 84-93). Rny change in the underlying *naturalw abilities of indiri4uals ar groups to enforce their claiss to resources in a hypothetical pce-contract world will nscessarily undernine the foundations of the existinq constitutional fraaework, and say therefore initiate pressure for a change in the current contractual assignwent of property rights {Buchanan, f 975, gp, 71-73) , levertheless, once the initial Nrules 05 the gane* have besaz detes~bned,marginal changes to these rules can be accoanted for by invoking the same Iujic as thst used to explain the selection, 43 gz;~, of the *optiwaZ* constitutian (Buchanan an8 lullock, 3965, p, 19). It is of course necessary to assuse that the choosing individual can rank the alternatives of collective as well as aarket choice, and that this ranking will be transitive, Since all subsequent propost tions derive dlrectlg from the individual rationality hypothesis, the same principle of substitution and the sase incoine-deaand relationships ate applicable to the contract theory of the state as to hhs traditional theory of market behaviout,

The contractarian approach iaplicitlp assuws that all state actioitp has a positire-SUB outca~eeither in the sense that everyone gains fro@the actions of the state or the loss to sorrre is more than offset by the gain to others (Dean, 1902, p,

Bf, As a result, contractarian theories ate characterized bg a

*marginalistW conception of institutional change, The state is regarded as a huwan artifact - the product ah conscious chofces aade by rational indivi2uals - and ts thus ibtrinsicakly perfectible, Xf an existing set of institutions is msuboptimal** in the sense that it fails to reflect a consensus, it will be possible to effect changes to which a11 ~eahersof the gtanp will agree, In term of orthodaa welfsre econanics, this type uf change is analogous to a Pareto-iaptovemnt, or a saveaent from an interior point to a point locate3 on the utility frontier

(Buchanan an3 Tullock, 1965, pp, I?* 3l8-3t9). Discussion aecessarily focuses upon the *i@arginsm of variation in political institutions, and the positive, predictive content of the theory concentrates upon the efficiency effects of alternative assigntitents of property tights or contractual forms. This is because the transactions costs associated with alternative allocations of property rights determine the teras of the contract, Different contractual arrangeaents carry with then different types of transactions costs reflecting varying enforcesent and negotiation requirewents (Cheung, 2969, po. 63-68), When engaging in any fom of economic or golitfcal exchange, rational indi~idualsgill contract with each other in such a way as to ensure that the variance in their incones is siniaized, subject always to the constraint of contracting costs

{gabeck, lg?f, p. 8251,

Both contractarian and interest qroup ~odelsdefine the state as an organization distinquished ftoa others by its coapatative advantage in violence or force, Rs we have seen in chapter 1, the essence of property riqhts is the right to exclude, an3 therefore only an organization which has a comparative advantage in violence is able to specify and enforce property tights (Barth, 198t, p, 4). Thus Wabeck (1980; 1991) develops a contract theory of the state which characterizes the potential use of force as a relevant constraiat underlying any initial agxeeaents which allocate wealth aBong co~petitors.

U@beckqs concern is to explain the assignaent of siining rights during the California gold rush f78.tx8-1566), Kn his model,

"violencen is daf ined as labour ti~eallocated to excludinq other inaividuals fro@ a aining clain, and all siners ace nssuine3 to be homogenous both in their abilities to atins an3 their abilities to exercise vio3.encs. The ainers do not hire *specialist enforcers* becanse the transactions costs of doing so are assumed to exceed the benefits, Tnstead, a system of property rights eaerges as a result of atteapts to reduce enforceaent costs by captaring the scale acono~iesavailsblc tfrrongh contract with other 5ndividuals (Uabsck, 3950, p, ?3) ,

This contract constitutes Q~beck'sWobbesian state:

The state is a contract, 3t is the explicit elebodi~ent of an agreement between individuals which specifies the rules or property rights within which all resources will be used snd snbsequent contracts forred, Xt is the original contract which precedes any and all agreements between individuals an? narks the eaergence of socic ty frofa the state of anarchy (Webeck, 1990, p, 3). Thus the final allocation of land aBong ainers is not explained by market competition, since the initial claims are not bought an4 sold; rather the rationing ~echanisnis the contractual agreement itself, "Any contractual aqreeacnt entered into by wealth saxieizers nust assign to each individual the tights to at least as nuch property as they could get with personal forcew ------,An alternative to the land allotsent contract is an antput sharing agreement, in which each einer wanld work a certain number of hours on a comaonly ouneR piece of land and the $01'1 output would be divided amnq all se~bersof the comttonity according to a specified foraula, Pabeck shows that the costs of reaching agreesent and mensoring or seterinq the agreed distribution would not differ significantly between the two foras of contract, but that the land allotment contract would be cheaper to enforce, especially as the nusbet of miners increase3 (1977, pp, 424-425). The contract serves as a ~cdiamof sociaf organization of econoeic activity, and as such perfotzrt~ several conceptually

different functions, 321 of which have to 30 with the fundmental economic tasks of deciding what goods and services

are to be produced, and in what proportions, as well as hou to

distribute the product alaonq members oh society (%night, 397 1,

pp, -6, First, the contract defines property rights and

prescribes the limits; within vhlch individuals make choices concerning resource use, Second, it assigns these rights

exclusively to individuals who agree to abide by the rules of

the contract, an3 third, it provides far the cnforceaent of this exclusivity, The extent of enforce~entcnpaci ty deterleines not only the effectiveness of the state bat also its geographic

limits, Having 3efined the state in these terms, it nou becoacs possible to explain nhp individuals choose ta include certain

provisions in the contract and exclude others, For exa~ple, the

California gold ainers apparently aqreed to restrictions on their rights to sell. or otherwise exchange their claims, an agteaiiient which has been regarded by traditional historians as

*inef f icientm or wirratioaal*, Bowever, ??sabeches aadel shows that such restrictions nay be fully consistent with an efficient allocation of rights if the constrai~tof positive transactions costs (especially enfotceeent castsf is taken into account, Bl~f preventing ainets from transferring their claims to other ainers who already awned land in the comaunity, the population of the district could be saintained at its original level, thns reducing individual enforcement costs through econoaies of scale. It was only when technoloqical chanqe occurred, with the introduction of hydraulic acthods of gold extraction, that the gains •’roe land consolidation Began to aatweigb the costs in teres of foregone scale econo~iesin enforcement (Wabeck, 1930, pp, 15-16). In contrast to contractatian or *pub1 ic interest* theories of the state are those uhich have been vatioaslp ZabeZled miaterest groupn, wredistrfbut2ire*, %onf lkt*, flaxploitatiann or *predatoryw theories (Rorth, 19Rf, p, 5; Posner, 1939, gp,

335-3335: Posnar, t981, p, 303; Dean, 1982, p, t), According to this type of approach, the state is an agency of a group or class, and its function is to extract incoae from the rest of the constituents in the interests of that group or class, The predatory state specifies a set of property rights that saxiaizes the revenue or wealth of the group in power regardless of its impact on the welfare of society as a whole (%orth, 1931, p, 51, In terms of Auster and Silver*s m6el of the state 3s a fir@, the relevant analogy is ta regard the state as *ownedn bp a particular indiofdual or groap in whose interests it functions, Unlike the Barxist view of the state as eaerging out of the conflict produced by the division of laboar, it is treated as itself a part of that division, Xn other wards, as the aivision of labour becomes Bore developed, a separate industry to ptonuca callective enforceqent of property rights is created - ie, rulers eaergc as a distinctive woccupatiaaaX groupn fftuster and Silver, 1979, pp, 24-25). According to interest group or preaatory theories, political choice is the outcosre of efforts of individuals and interest groups which place pressnre on the public authority

(the organs an3 institutions of the state) in the process of eaxiinizing their own private utility functions, The governaent*~ maximand is accotdingly assnsed to be a stable function of the utilities of the relevant interest groups weighted by their political strength OK influence, Thus there is no such thinq as a "benevolent governsent* striving to internalize all externalities and guiding a social veldate function that embraces unocganized interests (Cean, 1982, pp. 2, 8), For exaaaple, Beeker (1983) has devel.ope.jp a aodeX of conipet ition amsnq pressure groups far political influence in which it is assuaed that such influence can be expanden by expenditures of resources on caspaicjs contributions, political advertising, etc,

In the political equilibrium that eiwtges from this process, all groups eaxiaize their incoaes by spen3rnq an optiaal a~ottnt on political pressure, given the productivitJ ~f theit expenditures an3 the anticipated reactions of other groups, Becker abstracts froa the voting behaviour of individual sembers of the electorate an3 voter preferences serve only to aediate passively between pressure group activity and the responses of the state,

The reason for this assumption is that the tastes of voters can be sanipulated and created thronqh the inforeation ar aisinforsation provided by interesteil pressure groups, who raise their influence in prsciseTg this way, Furthezaore, Eecker follows Downs in emphasizing the extrewely Liaited incentives for individual voters to become fnlly inforsed about all political issues (Becksr, 1933, pp, 372, 392). The solution resulting fro@such interaction between the state and the gronps whose interests it articulates way be npoliticallp efficientn in the sense that the sua of the utility of the ruler an3 the influence-weighted utilities of the citizens is raxintized, bat that this need not coincide. atit\

"economic efficiencye, Certain groups of citizens may benefit at the expense of others without any compensatory side-payments, so that the outcam is not Pareto-optiwal; but the lasersq utility is weighted by such a saall political-2nflucnce coefficient that the behaviour of the state continues to be fully consistent with politicab efficiency as defined, Zn teras of 8ackerts analysis, the greater the influence of any one group, the less that of all coapeting groups, although even a group which is a net loser in the redistributive process can attenuate its losses by increasing its lava1 of expenditure on the production of political In€luence, Theref ore, the palitical game lodeled by Becker is zero-sus in influence, although it is negative-sum in taxes and subsidies because of deadweight costs (1983, p, 3763.

Similarly, one of the iaplications af Olsonfs theory of co1I.ective action is that the typical pressure group will, hsae little or no incentive to aake any significant sacrifices in the interests of society as a whole, especially if it represents only a saalf propartion of that society, The group can best serve its ae~bers*interests by striving to appropriate a larger share of total output, even if the social costs of the ensuing redistribution exceed the amount reaistributed, There is, in general, no constraint upon the social cost that such an organization will find it expedient to incur in the course of its activities (Olson, 1932, p, 4&) ,a@

Brennan nndl Buchanan 11990) propose a hybrid theory of the state which incorporates elements of both contractua3 an3 predatory behaviour, In their zeodel, the paver of politicians and bureaucrats is constrsined by rules initially laid down at a constitutional level. o f deli beration by rational citizen-taxpayers acting hehind a BawZsian veil of ignorance, Tn the post-contract period, however, governments (or, sore precisely, the individuals involved fn the govarnaental process) are able to exercize genninely discretionary coercive patier an? it is assumed that they will attempt to exploit that power for their own purposes (Brennan and Buchanan, 2980, pp, 23, 373, Brennan and Buchanan*~ conception o€ the state in the post-constitutional decision period is therefore essent ial.17 predatory: governmental 3ecision makers maxisize their own roan interest group theory of the state does not, of course, preclude the possibility that the state eap take action to increase econoaic efficiency, if this goal is promoted by one or more influential interest groups, or if a cheaper fin terms of deadueiqht costs) method of raising taxes or disbursing subsidies is discovered, The preaatorv state map then produce efficiency-augaanting redistributions as a side-effect (Becker, 1983, p, 384). utilities subject to given constraints, including those that way be iatposed by Deans of a constitution. Tn fact, the siinplest vetsion of the wodel is based on the presuaption that gooerneents aaxiwize revenaes frost whatever sonrces of taxation are made available to then cunstitutionally, Zf the rnling group is constrained to spend a certain amount of tax revenues on prescribe3 public goods, it is the s~rplasof total revenue over this aandatorp expenditure which becams the relevant saxiaand for state personnel, The interests of this eonolithic revenue-sax~aizing Leviathan are served autoaaticalfy as a result of the interaction of the whole set of individuab government decision makers even id no one person explicitly sets aa~isus revenue as the goal of his oua action {Brennan aria

Buchanan, 3980, p, 29). The state is thus treated as 3 collectivity which acts as a single entitp, thereby oimplifylnq considerably the complexittes of the political process within the govarnaent sector,

The redistributive role of the predatory or Wintersst groupH state is gost frequently evidenced by the behaviour of state agencies, bureaucracies and regalatory bodies, Governments are portrayed in such models as covertly using their conveatioftal functions in order to redistribute wealth, and econoaic regulation is explicitly sssuaed to serve the private interests of politica11y ef f ecti~egroups (Posner, 3974, p,

3P3), Fox example, Aaron Director has proposed a -law of public expendituren in which govern~ent spending is regarded as privately banefitting the sid43.e classes and finance3 bp taxes which are largely borne by the poor an4 rich, Stigler (1978) cites •’at@price supports, ainiaum wage lass, social security, public housing and tax exeltpt institutions as exaaples of public policies which have generaElp benef ittel the mi. dale classes, Tf the ruling coalition ai voters is to ~akeeffective use of the poZitical atachinery of the state to redfstribute income %n its favour, it taust identify a state acti~itpor expentlitate proqsaa whose benefits flow to the coalition in greater proportion than the taxes which finance it, Zn suppurt of his contention that classes of citizens strive to manipulate the iastitutians of the state to their own advantage, Stigler points out that the state is involved primarily in the supply of services, which also happenr to be extrea3el.p 3ifficult to transfer between cLasses because they are usually non-traded (Stiqlar, 1970, p, 53, A great deal of labour aatkst aiscriwination sap be explainel by expenditure an3 eaplayaent oractices which are eotivatea solely by a desire to redistribute wealth Sros politicallp powerless groups to a privileged coalition which is able to control the state to its own benefit {Preeatan, 1977; 1417&),

&ccording to this view, regulation is nsed as a substitute for explicit taxes and subsi3ies to transfer benefits froe one group to another, reflecting once again the fact that the purpose of the state is not to aaxfaize soae consensnal sociaZ welfare function, Instead, its actions constitute nothing Bore than a response to relevant interest groaps ffsean, 3982, p, 9). further application af the **interest groupn theory ad the state is to be found in Borcherl.3.ing*s explanation of the apparently wwastefnlw effects of pub1 ic supply (1983). G3tven that the objective goal of govern~ent is to effect certain politically (zathsr than ~tarket)atotivaked redistributions, the public bureau or regulate3 firs aay be the aast efficient wa7 to realize this goal, despite the'fact that on econanic qrounds alone it say rank as considerably inferior to a systea af private "contracting-out*, Becker likewise points out that, if public ownership is aa efficient way ta achieve the subsidization of certain favoured groups, replacement of public by see~inqlyatore efficient private enterprises could lover rather than raise aggregate efficiency because less efficient subsidies sust be used (1993, p, 38?), The: private fir@ has na interest in redistribution EN?& m, and a spster of contractinq-out vouln necessitate costlg monitoring to ensure that the state's redistributive goax was effectively pnrsned.

Bureaucratic or regulatory sodes of supply are sore *selectivsm:

A private firm will not have the same incentive to tailor benefits to the goliticallp wwarehp*, since its objective function contains peconiarg wealth arguments, not political ones, It will, to the eyes of the politicians, act irresponsibly, since it has, in fact, no incentive to dole out the transfers woptimallyn, but rather as cheaply as possible {Borcherding, 1983, p, 166). Borcherding cancludes that the mote isportant the qoal of redistribution in the provision of gtlblic goods, the sore likely

Lhis provision will be effected thrauqh state bureaus, Tn another study, Sorcherding shows that the public secto~Zs an extrenely effecrive iwdiu~ for achieving discri%inatorg redisttibutions of wealth in favour of politically powerfnl

racial coalitions (3977, pp, 5tt-55), 1% Weither the contract approach nor the predatoryjinterest

group approach to the state is free of serions analyticziZ oasissions, The contract theory explains the benefits to be

derived from econo~izingon the use of resources an3 theredare

emphasizes the role of the state in proisoting efficiency and

wealth maximization, In other wards, it deals priaarifg wikh the

gains of the initial contracting, Rsvever, i.t does not

aaequately explain the subsequent wi xltaizinq behaviour of

constituents with diverse interests, The predatory theory, an the other hand, ignores the gains of contracting and focuses

instead on the extraction of rents fros constit~ents by those

who gain control of the state (#arth, 1981, gp, 5-61, In an

attempt to reaedy these deficiencies, Rorth provides an alternative model of the state which represents a aoze qenetal

synthesis of contractarisn and interest group approaches,

Xn Botth's moiiel, the state exchanges a group of services {protection, justice, etc,) in retarn for revenue, Since there are ecortolxties of scale in praviding these services, the total wealth of society is aug~entedas a result of the activities of

the state, This is the only contractarian eleeeat of Rorthas mo3s1, The state also strives to maxiraize its own revenue (i,e, the wealth accruing to the rulers) by acting like a ------em--- - 1tSee chapter 3, section 3,3, t, discriminating monopolist and devising separate property rights

for each group of constituents, Pn 4oinq this the state Is constrained by the existence of rival ruling groups - Both external (cospeting states) and internal (coa~etinq political coalitions) (lorth, 1991, p, 7. Thus, on the one hand, the social welfare-augsenting function of the state i~pliesan efficient set of property tights to aaximiza societal output,

while the predatory aspect of the state iwplies an assignment of

property rights that maxiaizes the rulers* incoae: got surprisingly, "there has been a persistent tension between the ownership stroctnte which maxiaized cents to the ruler (and his

group) an4 an efficient system that reduced transactions costs and encouraged economic growthm fIbid,, p, 10). The result of

this contradiction is a system of property rights that is

frequently regarded as *inefficient" or even irrational by econoaists and historians (Yorth and Thomas, 1973, p, 8). An mefficlentm allocation of rights nray lead to higher income far society as a whole, but lower tax revenue for the rulers because of the transactions costs of aonitoring, setering and coZZecting such taxes, as coapated to a Bore ninefficientn set of property rights with lower associated casts, like the concept QF uexternalityH, the tera "eff iciencyN loses a13 ~ositivecontent and its definition cams Lo depend entirely upon the relevant

set of transactions casts, Tt is, in fact, onlv the existence of positive transactions costs that distinguishes RorthSs sodel

Eroa a purely contractarian or public interest theory and places it firmly in the category of a prematory conception of the state, Under conditions af zero transactions costs, the rulers could always devise an efficient set of rules or property rights an4 then bargain for their rents, in which case mxinrum societal. output would be consistent with ~axima~state revenues {Berth, IWI, p, I6n) ,

Rortb concedes that his mdcl has one majar shartcaaing fvhich it in fact shares with gl.3 non-contract theosies) - namely an inability to account for institutional change whtch is not initiated bp the rnling group, The rulers will ~ake institutional innovations in response to changing relative prices and transactions costs, For exaaple, a rise fn the scarcity of 'labour relative to land would enconrage the rulers to alter property rights allocations in such a way as to appropriate increased rents fro@ labour (Rorth, 1981, p. 22).

However, the aodel cannot acconwoi3ste institutional changes brought abont by the actions of Large non-rnling groups a€ constituents, This is becanse of the public good nature of any benefits which asy be derived fro^ successFuZ opposition to the state: no individaal citizen will have an incentive to initiate such opposition because the resulting gains will accrue to hi% regardless of the aaount of resources he devotes to achievinq

the^, As we saw in section 2,2,3, this free-rf?es problem has been analyze3 by Olson, who points out that it is extreaelp difficult to explain Barxist, class-orfented action on the tasis of rational, atilitsrian individuaF behavionr, The costs of ovc?rcorttinq the free-ri3er prob%aw are cunsfdsrabl~lower in the case of smaller, iaore cohesive qroups (Posner, 1991, p, 703). and Olson waintains that it is no coincidence that most successful revolutions have been bsouqht abont by the efforts of

*saall conspiratorial elitesw (Olson, 1965, pp, 105-1 O6),

North believes that the only way to circumvent the free-rider problem within the confines of his model is to soaehow incorporate the concept sf *ideologyw:

The study of ideologs and the development of some positive aodel on the free ~iderproblea are essential preliaiaaries to formulating a dpnaaic theory of change in the state (gorth, 1981, f, 21).

Stan?acd practice in the public choice literature has been to treat the free-rider problem as so savere that it is able to preclude active political participation bj! the individual arhbse interests sap be identifked with those of a large group, The rationale for voting is also not well nnderstaod, sfnce the total cost to the individual. citizen of voting exceeds the total benefit when neasured in teras af the expected value of changinq the outcoas of the election (5ueller, 1979, p. 120),*2

Nevertheless, there renains a lingerin? snspicion that ideas are iaportant in influencinq Isgislation, and this has progpted Ran lzFof the same reason, the individual has very little incentive to acquire information about pub3.i~affairs, The probability that any change in one person's vote (as a resoft of being better inform3 on the issues) will change the outcatiie of an election is vary saall, According to Olson, this %#perfect knonledge of the rational voter can explain the existence of lobby groups: if citizens were able to obtain all the relevant infotmation at zero cost, there would be no role for lobbyists (1982, p* 26). and Rubin to atterapt to separate e~pi.ri.caIfj the role of ideology from that of direct self-interest or indirect self-interest {mediated through lagrolling behavionr) in dcterainiog the votes cast on various issues by U,S, conqresssen

I1979a; 1979b; 1982). The iBeological orientation of each individual congressnan is ptoxied by the ratings assigned to hi% by public interest lobby q~oups. KaU and Rubin find thlt ideology is significant in explaining voting by pnblic representatives, even on bills concerning grimrily ecanowic issues and which therefore Rap be expected to reflect mare strongly the self-interest of constituents than the ideoloqicaZ positions o.f congresssen (397%. p, 39Q; 1992, p, BO),

Flore recently, Kalt and Zupan (198ti) have exasined the extent to which ideology, defined as the altruistic promtian of self-procfaiwed notions of the public interest, has inf luenced Dnited States Senate voting on a specific issue (naaarely, federal regulation of coal strip mining'), They find soae eespirical support for Kau and Rubin3s belief that the ideoLogical preferences of legislators, as distinct fro@ the narrow interests of their constituents, ma? be an i apartant deterwinant of their voting behaviour, XccorBing to Ralt an4 Zupan, ideological action by public representatives can be reqarded as analogous to wshirkingw or apportunisa on the part of corporate aanagelglent (1994, p, 282). There slay be saate separation af

*ovnershipn by constituents and "controPW by pclfcyaakers which enables a certain aeount of own-welfare maxlsizatioa by the Latter at the expense of the foraer, The naore expensive it is to

@onitas the VQ king behaviour of representatives, the greater the extent to which they will inAulqe their iOeoZogica1 whias, Anlt an3 Zupan acknowledge, hawever, that the ideological factor map be highly correlated with, as yet unidentified, constitnant interests, which could ttexplain awayw the importance of ideolar~p in the political process, For exaaple, idealoqp may cosprise little sore than a convenient "rule of thualAbn which, in a worl? of costly infornaation, serves to sunrararize a legislator*^ . stan3 on a wide range of issues and thus Zacil.ltatr?s the choice of representatives on the part sf voters [Kalt and "Enpan, 1990, p,

2SQf , This view is corroborated in a stud? by Psltzafan f I9BY). in uhich he attearpts to separate the affects on Senate voting of constituents* interests and those of campaign fund contributors on the one hand, froe that ah party affiliation or ideology on the other. Ps3tzmanfs purpose is to show that ideology weasures, such as interest group ratings, only appear to "explainn voting behaviour because they are correlated rf th relevant econosfc variables uhich have been omitted in earlier work, Re proposes a simple principal-agent a0391 in which Leqislatars articnlate the parochial interests of their constituency with ideology plapinq an infor~atioaal role analogons to that of a brand naae in standard deaand theory, The saae *rational iqnorancem on the part of voters which permits shirking bp representatives in 4aIt and Zupanas aodel could equally result in a tendency for voters to use cheap suarsary indicators of interest, such as a candidate*^ party or reputation for Iibezalis~,as an input into their decision aakinq process, In other words, not only is there a strong degree of collinearity between the ideological orientation of a congressaan and the interests of his supporters, but the Eor~sr is ,------Petermined by the latter

{Peftztaan, 1984, pp, ?93, 395). #iccotding to Peltz~ian, appropriate definition of the variaus coepanents of voters* interests obviates the need to treat ideology as a residaal category in explaining voting,

R positive economic theory of ideology resains to Be developed, although Kau an4 Rubin speculate upon the potential usefulness of Schulapetert s view that capitalist society creates a growing body of *'intellectnals* who wield substantial paver through the media and thereby condition the ideological clia-nte

(1979a, p, 367; 1982. p, 23). Rnothet possibility is to view individual eeebership of politically actire pressure groups as a consunption goad, Consurtrass leap desire (for whatlevst reason) to puschase a good called *participa tionn, the deaand for which cauld be assuaed to depend on such factors as incoga or educational levels {Eau an8 Rubin, t979bV p, la?; Auster and

Silver, 1979, pp, 99-95). Such an explanation won13 be consistent with a ao4ifie3 Schuspeterian theory of ideoloqy, according to which the stock of Qiatellectualsu increases with the total veal th of society, and individual intellectuals Bare an interest in opposing both entrenche? theoretical opinions and entrenched institutions, since a relativelg higher payoff will accrue to those who develop a csntincinq intellectual case agsiaat the status quo (Xau and Pubin, 1982, p, 26). Apart fro% the exploratory work describe? in the preceding paragraphs, however, very little formal effort has bacn devoted bg economists to analyzing the influence of ideas on political action,

Despite its neglect of the issue of ideuloqy, #orthas theory of the state represents the mst abstract and the most general within the econoaic parailigw, Xn chapter 4 we. will develop a siapls explanatory model of the evolution of the South

African political systea vhich incorporates soqe of the features of t4orth.s analysis, ae will also propose a way to circumvent the problen of accounting fat chanqes precipitated by the actions of non-ruling groups, This salutian is suggested by a nutuber of econoraic theories of politica3 behaviour, surveye4 in this chapter, which involve an eatension of the analogy of aarket caapetition to the sphere of politics, kt uould seeB that ths free-rider aspect of collective action applies as nsnch to the ruling group as to its subjects, and we will attempt to show that it is possible to preserve the iha of an minterest groupw or predatory state while at the same time accoa~odating both rational indlvi3ual behaviour and cospetitive interaction between agents, A aodel of this nature uould thus have to involve a theory of political cospetition drawing upon the wort of ~odernpublic choice theorists discossefi in section 2,2,3, in order to account far the transformation of indivi&ual oaxiwizinq behaviour into collective action, fn this chapter we will review sme of the literature that has asveloped in response to the need to explain such phenosena as racism, prejudice an3 apartheid, with special reference to the South Afticsn context. Ruch of this literature lies outsZde the traditional boundaries of econoaa5cs and, in os3er to do ft full justice, it wouli? be necessary to encroach on the preserves of other social sciences. The extent to which this can be achieved here is severely Xisited by the fact that the present author can clais little expertise or training in these disciplines. Consequently, the coverage of the discussion that follows will be biased in favour of econosic studies of the apartheid systea.

Rererthefess, we begin the chapter with a brief survey of a nu~tberof different socioZorfiica1 and ps~cho'logicaf approaches to the problem of racial prejudice an3 ethn5c exclusivisn. This is fo%lowed by a wore detaifaB theatsent of orthodox ecbnalliic theories of rsce discrinination, Thereafter we turn explicitly to the case of South Africa an? provide a critical rewieu of several studies that have atte~pte3 to account for discriaination in the South African labour aarket and to explain the unaerlpinq rationale for the apartheid spstehn, This is followed by a concludinq section in which we allude to the long-standing icieological debate upon the rationalitp OF aparthegd as a socio-economic system, and thereby prepare the my for the analysis in chapter 4 by indicating how the approach to be adopted there relates to that debate, Specifically, it will he argued in the final section that apartheid can rost fruitfully be regarded as a rations?. response to economic constraints rather than as a set of beliefs with nu basis in

S!xluGist siG !!earLP%ia f 4e2L231 Sociologists, historians and political theorists have utilized a nu~ber of theoretical perspectives in order to provide an explanation of the emergence an4 etaluii,on of the apartheid political systea, Tn an extremely usefnl survey of this vast and diverse so~inl science literature, adas and

Giliolnee (1979) provirle a taxonoaty an31 critical appraisal of these various approaches, ft will be helpful to briefly suaaarize their six categories at this point,

(i) Calvinisar and religiously induced rjre judice:

The irrationality and inperaeabilbty of Calvinist religions doctrine has been viewed by some theorists as proriain9 a justification for the wexclusion af the children of fla~~,Thus

Be Yifliers shovs that the protagonf sts of apartheid have often been able to exploit a nea-Calvinist philosophy to prove the necessity of maintaining national or racial identity as well as to justify divisions between nations an? races (1971, p, 373). Such xigia racial outlooks are farther transmitted an+ reinforced by s religisusl~ sanctioned patriarchal faaily systela, However, Adaw and GiEioaee point out that social-psychological an3 eeliqious theories of prejudice neglect the objective socio-economic conditions that i3z&e3minq religion and ideology as endogenous outcoaes, Belief systems are sore usefully reqar3ed as emerging or evoPsing in response to the nee3 to interprgt and accoaaodate a changing socio-econoaic environaent (&dam and Gilioaee, 1979, p, t8), {iif The fascist analogy:

The literature on South Rfrica is daainated by associations of f ascisa and ~talinisa, encouraged, no doubt, by the evfdknt structural violence of the systew inherent in its restrictive laws, Accorainq to Adaa an? Gilioaee, however, apartheid didfers froa fascisa an3 Stalinism in that it does not aia at roaaufding traditional institutions in the iaage of a gloirified utopia, As a group (rather than individual) dictatorship, the South Aftican systeB can be expected to putsue @ore rational policies of privilege aaintenancc, coaparea with the emationa3. an4 irrational dictates of a charissatic fascist dictator, Apartheid society in fact displays an cfewnt of pragaatisw and a potential for internal liberalization which are both alien to the fascist state (Adam, $971, pp, 152-153). The South African system is legalistic rather than arbitrary and, even in its aost harsh and paternalistic rhetoric, apsrthei4 ideology has never denied the right of existence to duainateA gronps (Hanf, Weiland and Vierdag, 1981, p. &?fa In addition. South Africa's considerable international 3ependencp places restraints on the ability of the white power stractore to rely on coercion alone.

Instead, it seeks to solicit the acquiescence of its subordinates rather than their ideoloqical mobilization, (iii) The focus on racism: a great deal of liberal analysis has tended to attribute to traditional racisa an autono~yand dynamic of its own. Emphasis is placed on the attitudinal aspects of ptejndice and irrational hate or rejection of other race gtaups,a Soch ethnic or racial conflict is usually regarde3 as arising in situations of state violence against a scapegoat rainority (e,g, la2 i Germany), colonial labour exploitation, or ethnic qroup co~petitionwithin a single political. juris4Lction (e* 9, "rr them Itreland, Lebanon,

Cyprus) (adam and Gilionaee, 3979, pp, 36-39). Governwent policy ------%This approach appears to 3erire credibilit~from the proclaoations of apartheid ideofogues, who the~selvesidentify differences f n racial and cultural characteristics as the prinary aotivation fur segregationist behaviour, For example, an historical analysis of the origins and evolution of the *apartheid ideaw leads Rhoodie and Venter to conclude that Rcolour was accepted, by n process of psychological associatian, as the outwar3 ~anifestationof eore deeply seatea cnltural and social differences ,,, Colout becaae the criterion with which the standard of cultural and sociaf de~e2opaantof an individual was judged ,,, To a significant degree this may be attribute3 to ,,, the fact that, as far as civilisation and general derelupment are concerned, the Bantu was, and still is, by coraparison an inferior raciax group* (1360, p, jBr3). in South wfrica, however, does not fit neatly into any of these categories. This is because the explicit institutionalization

an3 legalization of racial criteria for exclusion has been

directed as ~uchat fostering the unity of the Rfrikaner group

in the face of its own internal stratification as it has aim?

to contain the "black threata, Thus, accordinq to Adar and

Giliosee, anti-black racisa has not been the principal

wotivating fotce, but rather a by-product, of attempts to nni te

Afrikaner interests as a prerequisite for the attainsent af

political power 11979, p. Bt) ,

(i8) The concept of mplural sociekiesq*z

The theory of the plural society is associated with the work of

socioloqists such as G, Sltiith, J, S, Tfurnivall, Leo Kupe~and

Pierre van den Berghe (Schlear~er, 19?7f, A plural society is one

in which ethnLc categories live side by side, with iadioidnals of differing ethnicity meeting only in the ~arketpface, These

societies are often viewed as emerginq out of the disintegration of native cultures under the ispact of colonialism (Rex, 1976,

p. 45), and the dorttination of one ethnic group over others is

treated as a proble~ which is intrinsic to the concept of

pluralhsar (-Ran€, Hei'land and Vierdaq, 1987, p, 6; A3aa and

Cilioraee, 1979, p. 43; Li jphast, 1377, p, 18). According to

Schle~ltaer, social qroug formation in a '*plural societyw can be

based upon race, ethnicity, caste, class, reliqian, or any coabination of these, The unifying i3ea behind all theories of pluralisla is that the 3istributi.o~ of rewards in society is deterained by competition between larqe "corporate groupsu or

T*coaaunafly bounded #assesn rather than s~allelites ~t cliques, An ideology of popular social coal~unalisl~(which in the case of

South Africa has been referred to by Roodie (5975) as the nAfr ikaner civil religionn) serves to define the *'identity needsw of a mass of people and to mobilize them in pursuit of those needs fScttleremer, 1973, p. 7),t The problem with the pluralist perspective is the assuaptioa that **cultural diversityn in itself is sufficient to cause societal fnstabflity and the doaination of one ethnic group aver all others, Tn this way, ethnic conflicts ate treated as independent of the degree of material eqnality an3 the distribution of resources, and economic factors are thereby excluded frsa the analysis, In the words of Adam and Gilionree: The pluralfst perspective tends to reifg cultural differences as if they fete immutablew (1979, p.

(s) The focus on class formation: narxist anal~sis, unlike those explanations based solely on racism or cultural pluralism, emphasizes the economic benefits of racial exploitation, Orthodox 3arxists view apartheid as a sere aanipulativa device for oppression an4 control of labour

(Segassick, 1971)). while neo-Rarxists have focused on the diwergent interests of fractions of the working class [far

-----I------taccarding to Roodie, a *civil religionw denotes the religious dimension of the state, where religion is 3efined broadly to include any set of sy~bolswhich serves to assist an individual or gronp in meeting its need for identity and destin~{Boodie, 1975, pp, 295-296). exmpfe, the latter account Ear the relative quiescence of white workers since 1922 by the fact that they receive a proportion of the surplus generated bp the forced labour economy, and therefore identify their interests more stronqly with the capitalist class than the working class), However, Adas nn4 Gilio~ee argue convincingly that both orthodox narxists an8 neo-tlarxist analyses of Sonth African society have displayed an overly si~plisticview of the role of beliefs and ideology, !laterial rewards are only a part of the payoff that accounts for the waintenance of Afrikaner unity, !?pual.Zy important are the csbesivc power of the spabol spotea, rewards of esteew an4 status, and the integrating role of ideology (A3an and Gilioatee,

1979, pp, 49-50),

(vi)"re colonial, analogy:

South Africa is sosetimes considered as the last outpost of an outdated systew of alien rule, The eventual deaise of apartheid is accordingly regarded as certain as the departure of the European powers from the rest of ;Africa. This colonial pecspectiee, however, has little applicability to South W f rica,

The industrialization of the country coincided with the eiuergence of a genuinely indigenous capitalist class an? an anti-colonial moasmnt,

Once cultural and econa~icmobilization was successfnlPy achieve3 among Afrikaners a share in an4 later a takeover of exclusive central political power resaine3 only a satter of ti~e,,,(#da@ an? GIZiosee, 1979, p, 52)* Ln addition, there is no discernable conaon isparialist interest between South africa an3 ot h.;r suppose4ly ninrperialistn pouars,

In fact, relations between the taro are often characterized Dp frictions over such issues as the conditions under which foreign capital is peraitted to operate in South aftica (Adant an?

Cilioree, 1979, pp, 56-55).

After identifying the above six categories 02 socio2ogical theories of racism, ptejudice and apartheid, as well as the weaknesses associated with each approach, Adaa and Gilioaee proceed to elaborate an alternative perspective (that of wethnicitp* or "ethnic aab ilization*) , which coarbines the pXura1ist emphasis on ideology and culture as cohesive factors in group orga~izaticsn with an explicit recoqnition of the isportant role played by econo~ic casts and benefits, The concept of ethnicity as applied to South Africa by A3a~ an4

Gifioaee is thus consistent with, and in fact provi8es a useful descriptive backdrop to, the econoaic theory to be proposed in chapter Y, Adaa and Gilioaee's approach will therefore be dealt uith separately in section 3-4 below, &zJF 1 Eg&&&sn& zu~s~nf ~~onq~~c T&ge~Lss zf f~49 ------Discriaination A aaoclassical ecanoaic explanation of race discrimination in the labour market would not accept a rigid wags differential between blacks and whites of equal productivity as a qiven datua, but woull atteapt instead to explain the differential in teras of racially differing casts an3 returns to wage equalization f Beder , t 973, p, 9 7). while the earliest statesent of the neoclassical theory of discriaination can prabaklp be attributed ta E3qeuarth in 1922, aasi cnrrent work derives fram

9eeker (1957) and elaborations of Beckerts model Dp Krueger

(??63), Welch {??ti?), Arrow ( t9?2a; 1972b; 1Qf 3) , Zllexis (19f 3).

Stiglitz 139733 and others. According to Becksr: "If an individual has a 'taste far discriminations he aust act gt if he Mere willing to pay sotaething either 3irectlj cr in the forw of reduced inco~e,to be associated with sose petsans instean of othersw (3957, p, 14). Assuning perfect competition, homogene~ns factors of production an? fixed institwtianal arrangeaents,

Becker defines a mdiscriaination coef f icientn to measure the

"taste for discriminationM for different factors, employers and consumers, Far exasple, if an employer faces a money wage rate, w, far YOZ~~ES,then u[t+cf(i)) defines a net wage rate, where

3 (i) is the dlscriraination coefficient against factor i, arrow shows that d (i) equals the aacginal rate BE ~~bstitutionbetween the firals profits and and the degree of elrtployment of this factor (1473, p, 71, Sisilat coefficients rsap be define3 in tsras of employee or custoaer discriaination, Becker also utilizes a co~petitiae trade model to illustrate the effects at discrimination on exchange between two

*sectorsa - Uhite (W) and Black (f?), Tt is assumed that .the 8 sector is relatively better endowed with capital than the B sector, Also, assalrting ideatical linear27 hoaroqeneous production functions and perfect substitutability of capital and lahour between sectors, it follons that the marqinal product of labour is lower, and the sarginal product af capital higher, in the 9 sector than in the %J sector, Tn a ~non-dfscri~ination equilibrium*, even if labour is inaobile between sectors, sufficient capital will be exporcte3 froa V to B to equate these

~arginalproducts. But if V capitalists suffer a wpsychic costw when their capital is used in B, BecRer shows that their net return is reauced by an aaonnt depending on the ~agnitudeof the discrimination coefficient , The existence of a positive coefficient thecef ore induces sub-opt%raa'l export of capf tal f ram

V to 8, with the result that factor price equalization 4oes nut: occur an3 black workers and white capitalists lase income while white vorkers and Black capitalists gain {seeker, 1957, p, 21). This analysis, however, implies that uhite capital ounars have no incentive to aiscrininate if their aim is to waxi3ize their own incowes and if they are assused not to have a taste for discriatination, Krueger f 1963) dea~onstrates that siati2ar results to tbose of Beckel can be obtained by assuming that uhite capitalists aim at wn~ielzing the Incone of the white coainunitp as 3 whole, or by assusing that public expenditure

(e,g, on education) is allocated in a iliscritrrinatorg way,

SLlaiZarly, Alexis (1973) shows that *envy-mllcen towaras blacks my explain discriaination on the part of white employers who do not associate physically with black workers, His analpsis indicates that, by adding the share of wage incose received by white workers to white eaplopers* utility functions, black vaqes are depressed below those of whites of equal iproductiwity, plyen if employers have no actual aversion to working in proximity to blacks (illexis, 1973, pp, 298-299).

#e,lch (?967} uses a raodel similar to that of seclrer in order to show that discrimination mybe sore the result of the white worker's aversion to working aZongsi3e blacks than of the smpXoyerts taste for discriaination, lor exaaple, the productivity of a white superrrisor Bay decline if ha is required to work in association with a labourer of a different race, This would have particularly significant results if uhite and falack workers were regarded as cosp2ements rather than subst5tutss

(e,g, educated white labour and unskille.3 black labour Ray be treated as coaplements in prodaction). Welch shows that eaployars d ill integrate their workforces up to the point where the marginal efficiency gain resulting fro%the cospleaentacitp between fiuaan capital and "rawn labour is just equal to the warginal loss resalting ftoa the inefficiencies of association between blacks and whites f9elch, f967, pp, 229-30),

Arrow points out that the bulk of the earnings differential between blacks and whites in the Unite? States is accounted for by differences in wage rates - partly because blacks are concentrated in low incom occapiations (job disctieination). and partly because they receive lover wages even within given

occupations [wage discriaination] (Arrow, 1Q72a, p. 841 ). Mst neoclassical theories focus attentZon upon the latter, Bat if ue assuae heterogeneous skills (jobs) and a carrespondinq dispersion of wages, then jot discrimination can be collapsed into wage discri~ination aetely by defining each wage-ski11 level as an moccupationw {Gain, t97G, p, 7232). Xt is ieaapiricall.7 difficult to disentangle pay diffsrences arisinq froar differences in job content frm those atisinq out of pure wage discriatfnation, although in the case af soath Africa [where aost of the disparity in earnings is due to statutory and institutional discriaination against blacks in access to higher paping occupations), aost wage discrimination reduces to -job disctieination, with the important exception of the public sector where overt wage discritnination does exist at the lower levels of the occupationaZ scale (Knight ant! BcGrath, 1977, p,

2561, 1 full qaneral equilibriu~ version of Eecker*~~odel of discrimination has been developed bp Arran (1972h: 1973), The supply of capital to each firm is assuim4 to be fixed, so that output varies vith the quantities of white and black lahour {W and f3) employed, The supplies of and B are perfectly inelastic, The production function is strictly concave an? increasing in tJ and B, Arrow then proceeds to show that, if w is a positive argu~entin the eaplayet's utility function and B is a negative arqument, then in euuilibriua white workers a re. psi3 sore, and black workers less, than their (common) earginal proauct (Arrow, 19?2b, pp. t87-788; 1973, p, 7). TE all eaployers do not have idantical, utility functions, so that solacl discriainate to a lesser extent than others, co~petitionwill tend to eliminate discriatination in the long-tun, Only the least discriainating f ir~ssurvive Becaase discrieiaation is l ike a tax to the eaployer in the sense that it shifts his demand for labour to the aore cast'lg component, Like Uelch, Arrow incorgorates the case of discri~inationcaused not by employer preferences but by the 4esire of uhi.te forenen to work vith fellow white rather than black workers, It is assneed that the f ore~an" sage bears an inverse functional relationship to the proportion of whites in the total labour force, and it then follows that a white worker is worth Bore than his ~arginal product and a black worker is worth less to the fire even if the employer hiasef f has no taste for discrimination. Arrowts model implies that discrimination will tend to be

disinished by coapetitioe pressures in the long-run if it is caused By ewployer preferences, Similarly, long-ran equilikrium under a regime of employee discriaination results in segregation

with equalize3 wages, Cost ~Lniaizingffras will hire either an all-white or an all-black labour force, and pay the same vaqes

in either case, However, if non-discriainatinq fir~sare unable to hire all the available black labovr due to decreasing returns to scale, there could be a testdual of blacks available 'to be hired by discriiainating firms, so that the wage differential may persist without the occnrrance of full segreqation (Treeman,

1974, pp, 35-36; ladison and Siebert, 1979, p, 2W), lrrow shows

that, in general equilibrin~, the presence of positive cogts associated with' adding new black and white workers to a firsts labour force mans that discrimination an the part of white

eaployees can result in the coexistence of wage differentials with some degree of segregation (1972b, gp, 194-798). In the absence of anp such exoqenausly iwposed transactions casts, houeser, StiqPitz (1973) has illustratei? by Beans of a general equilibriu~trade aode l that wage differentials cannot pe tsist

in the long-run, regardless of the source of discri~ination,Kn the case of eaployee discrieination at its aost sxtra~e, white skillea workers will work only with white anskilled workers, and

black skilled nith black unskiPled, This is analogous to tt conventional trade ~odelwith zero factor oobility, But the factor price equalization theore@ implies that trade in comaodities is a perfect substitute for soveaent of factors, so that the equalization of factor price ratios will still occur even in the case of complete segregation, Tf we assume that anly white unskilled workers have an aversion to working with blacks, but white capitalists and skilled workers have nu such taste, then we are left with a trade madel characterized by qqqs factor ntobility, As long as all but one of the factors are mobile, factor price equalization will occur even in the absence of cos~bditytrade (Stiglitz, 1973, pp, 268-2893, #trow also postulates that employers* hiring practices map be based not an an exogenotts '3taste for discrilaination", but on

8*perceptions of reality* ft9f2a, p. 96). For exaeple, employers eay possess the preconceived idea that the productivity of black workers is less than that of rhites, SO that they are only prepared lo hire blacks at a lower wage, Phe'lps (1972) refers ta this as *statistical discriaination* becanse it hinges on different statistical probabilities of black and whf te workers being qualified for a particular job, Skin coloar say be regarded as a proxy for relevant data which is not saapled by mans of screening, testing ox other costly foras of personnel investwent (Phelps, '1972, p, 659). ff the e~ployer knows that the statistical probability of a black being inadeq~ateky qualified for a particular job is greater than that of a white, the white wage rate will exceed the black nap,

If discriaination is to be explained by *beliefs atout reality*?, it is necessarp that we be able to account for these beliefs. Arrow considers the psychological theory of g*cognitL~e dissonanceH (3etiving fraa the work of teon Fastinger) as one possible way to achieve this, The theory maintains that behaviout becoi~ssself-fulfilling: ",,, if individuals act in a discriminatory wanner, they will ten4 to acquire st develop beliefs which justify such actionsn (hrtou, 1973, p. 26). Tht probfcs are~ains, of course, to explain why rational economic agents would persist in such beliefs in the long-run if the7 were consistentf y prove3 to be erroneous {flarshall, 3974, p,

The ecunoaic theories of race niscrfaination reviewed above suffer frow two major shortcoainqs. The first derives frog the long-run imaplications of these nodelst nanaely, that competition will ultimately eli~inatethe dispersion of wages and replace it with full segrsgation, There is no convincing empirical evidence to indicate such a tendency, which reflects upon the usefulness of this type of aodef. 3 A second weakness of the Becker-Arrow analysis is attributable to the ad koc nature of the discriaination coefficient, Tn the worh of Farshall, this type oE theory: .,, becoaes @ore nearly a theoty of wages with an extra term - the discrraination coefficient - where the specification of the aodel predeter~ines the outcoae, than a theory explaining the basic causal farces behind discriwinstion. The results of this foriaulatian are true by definition - blacks must accept lower wages than ------whites in order to get jobs (Barshall, 1978, p, 862), =The eapirkcal issues associated with tes tinq econo~ictheories sf discriaination will not be pursued here, The reader is refarred to Harshall (1974) for a survey. Fiothing is explainea about the underlying -leterstinants or the nature of the discrimination coefficient itself, In order to enhance the explanatory ponsr of the theory, the "taste fur Biscrirainationn needs to be treated as an endoqenoos consequence of rational economic behaoiour rather than as an independent deterainant of such behaviour, For example, restriction of access by blacks to education is likely to produce a pecuniary benefit for whites, who thereby i~prove their own job opportunities and incoaes, This behaviour fallows directly. fron econo~ic ~otives and not fro@ some exogenously iiagosed ntaste for 3 iscriainationn fftddison and siebert, 1979, p. 2132).

The stanhrd coapetitive modell can, however, provide an appropriate price t heoratic f raeenork for investigating labour

~arketdiscriaination, providing it is coabined with an analysis of collective behaviour which ewphasizcs the ability of bnc group to use the instru~ents05 the state in order to restrict the options available to another groub, Such a %ode1 could also ------account for sudden and dra~atic shifts in discriainatorp *Tn fact, there appears to be an inconsistency between PecFrerta early work on discrieinatian and his subsequent exposition of the aeconoaaic approach to human behaviourm, The methodological cornerstone of the latter is the proposition that differences in behaviour can more usefully be explained by differences in objective constraints rather than in terms of changing tastes, (See tbe discussion of the ffeconosic approachw in chapter 1.) Becker*~previous analysis of discri~instion,however, relies on an exogenous taste pararetet, rather than on the nature of the constraints inpinging upon the individual agent, in order to account for the extent of dlscrisination, The theory of apartheid present@$ in chapter 4 siag be regarded as consistent with Beckerss neconomic approachw in the sense that it is an atteapt to provide an explanation of the unbctlying econoeic wotivation for racist behsviour. behaviour which the standan? theory has BifficuXtp accoamodatinq

(Preerrran, 1973, p, 286; 19?&, pp, 33, 37), For example, Freeia3n aaintains that: Governmental discri~ination in school spending, public services, and enploywent practices can be expected, in general, to produce incose gains for the dominant group (1973, p. 295).

In these types of situations, aaximization of the income of an anfranchised subset of the cornatunity produces discrinination in the provision of educational and other public resources, and offers a ndiscrieination-for-g3inn rationale far policies such as those of the southern O,S, states or the South 8f ricsn governraient (Freeman, 1974, p, 40). 3orcher3i~qpoints out that race prejudice has often been used to effect a re3istribution of wealth or resources fro% the politically pcwerless to the powerful (1977, p, 541, For exawple, the reason for tsce discriaination in the supply of public qoo3s such as education is precisely that politics rereit and encourage this kin3 of coercive income transfer, Rtejvdice and ather barriers to entry into a group (such as skin colonr, language, caste or reliqionf serve to re3uce the costs to political entrepreneurs of organizing racial or ethnic coalitions and af monitoring (by means of custom an3 sores) the behaviour of those group laenbsrs who aap attaapt to undermine its cahesian. Prejudice not only reinforces gronp solidarity, but can also function as a device to rationalize exploitation of another group by fiscal or ather mans fBorcherding, 1977, p, 55). It will be irrgned in section

3.4 below, and in chapter U, that apartheid represents a set 0% redistributive policies iftplaaented in the interests of a politically powerful coalition, and it follows that race prejudice can usefully be regarded as a maans of mobilizing an3 sustaining collective action alaed at maxi~izing the benefits accruing to the privileqe9 group,

the structure of wage rates, These institutional features of the labour aarket together coaprise the aost iaportant econoaic sanifestations of apartheid policy.5 --*------%The actual Legislative insttuaents UP apartheid are aescribed in appendix 2, Apartheid itself Bay be defined as the philosophical bel ief in, and political coa~itmntto, the achievesent of complete separation between the races in the social, economic and political spheres (Rhoodie and Venter, 1960, pp, 22-23). Aparthein has evolve3 out of earlier versions of seqregationise and racial differentiation which existed prior to the 1948 accession to power of the Rational Party, tut differs in significant respects from these historical antecedents, Bar erasple, segregation representea the initial response of whites to the presence of an overwhelming black aa jority, an3 consisted primarily in an attespt to physically isolate white society fros those elements of inteqratian which ware perceive3 as undesirable, The motives for segregation were given classic expression by the chaitaan of the Ttansvaal Locnf Gotrernnent Conaission of 3922, Colonel C, F, Sta'llard: Vhe native shoula only be allowed to enter the urban areas, which are essentially the white aanes creation, when he is willing ta enter and to minister to the needs of the white man, and should depart thsrefroa when he ceases so to aiinistsr?rW(Stsenkamp, 1983, p, 68). according to Rhoodie and Venter, seqregation is a stage in the evolution of apartheid, an4 is not synanpsans with apartheid f t961J, p, la?) IndnstriaXization and urbanization Bean t that segregationist policies becaae increasing1y W number of econowic ~oaelshave been developed to explain, or,

in ~ostinstances, sinply to characterize the racial waqe diEEerentia1, the inequslity of access to certain occupations and the resulting racial distribution a•’ income in South Xfrica, uhile at the snae ti~eattempting to acco~wodatethe uniqne institutional structure of the economy.

Knight (1964) describes the South Rfrican econong as a classical Lewis-type "dual econoayw in which an underewplaya-4 peasantry in subsistence agricnlturs proviaes an elastic supply of unskilled labour to the *capitalistm or modern sector, XI1 black labour is assuaed to be unskilled, and the black wage rate is deterained exogenously by the average product in the reserves, All white workers are ski11e3, and the vhite workforce is always fully eaploged, A Robinson-Kaldor type Keynesian theory of incawe distribution is osed to explain the share of profits in the modern sector, while the standard aarginal productivity theory is invoked to determine the esployment 2nd ------wage ratios of vhite and black labour, The level of incoae, 5(cont9d) ina3equate to the task of reconciling the needs of 3 burgeoning black working class with the destre 02 uhites to protect their privileged position, It was precisely the econosie integration of blacks which ~adenecessary the replacesent of segregation uith a fully-fTei!ged policy of apartheid, The latter eebodies several revolutionary principles, the wost important of which include =the recognitZon that the Bantu does have within him the capacity to develop to the same leva1 of civilisation as the whites; the realisation that the Bantu cannot for ever for@ a labouring-cl ass proletariat; and the idea that pzovisian wust be aade for the express%on of the reasonabfe national and political aspirations of the Bantu, The most important of these three apartheid concepts is undoubtedly that of granting home rule to the rjantu when his development juskifies itn {Rhoodie and Itenter, 1950, FP. 243-2YB), black eapfopaent and the white wage rate are deteriuined endogenously in the sodel., Knight shows that the white wage is both a rent secured as a result of the aonapoly of skills, an3 also a reward for higher productivity at the rargin, A dynamic version of the %ode1 indicates that growth in the rodern sector benefits the tuo labour forces in different ways, #hit@ workers gain fro^ higher wages due to increases in kath black and white labour pro3uctioity, while black labour benefits only to the extent that growth provides Bore errrplap~ent far. the undersaplopel (Knight, 1959, pp, 308-309),

Rnightts aodel represents a siapfe and useful framerusk upon which subsequent refinements have been built, By itself, however, it 3oes contain a number of shortcorings, not least of which is the fact that it does not proviae an explanatory theory oE the apartheid syste@; rather, it consists of nothing sore than an atteapt to mo4el the effectq of apartheid on income distriba tion without addressinq the underlying determinants of apartheid institutions, In addition, Knight assumes that 3x1 black workers are unskillsd while a11 white workers ate skilled, thus abstracting entirely froa the possibility of job coapetition between black and white workers, Re justifies this assueption on the grounds that the educational and social syates and trade union policy (lespeciallp "rate far the job rulesHQ) ------6The insistence on "the rate for the jobw on the part of white trade uniunists has historically serve3 to preaent the undercutting of white wages through the competition of cheaper black labour, See chapter 9, section Q, I, have enabled the white labour Eorce to monopolize sRille4 occupations (1969, p, 2W). However, in a subsequent article with 8cCrath (19771, Knight has recognized that the! assnraptfon of a hosogeneous black labour force, while perhaps a reasonable characterization of the 1950s and earfp 1960s, has becowc less appropriate ia the light of the rapid industrial. growth that has since occurred and the consequent acquisition of skills by increasing numbers of blacks,

Enight and YcGrath (1977) regar3 the theory of ncravdingH

(first forwulated by Edgeworth to explain wage discrimination between the sexes) as a useful description of the South African institutional fra~euork,white workers are viewed as possessinq sufficient political power to control access to skille3 occupations, thereby Hcrovdinqw larqe numbers of blacks into the renaining unskilIe3 occupations and 3epressing the unskille3 wage rate, The scarcity of alternative opportunities for skilfe? blacks iaplies that the supply price of their lakour is less than that of whites possessing identicah stocks of human capital, which in turn ieplics that blacks can be resunerated at lower vaqe rates than whites in the saae skill category, Thus, according to Knight and #cGrath: , the most plausible reason for d3scriainatlan in the South African case lies in the possibilitp of White workers taisinq their incomes by weans of jab discriminntion and in their power to do so through various forms of collective action,, , Econoaic discrimination in 5oath Africa is deeply rooted in the econa~ic interests of white workers and is not serelp the result of atoral deviation or irrational racial prejrrdice (197 7, p, 27 1). The underlying determinants of the Pnstitutfons of apartheid ate thus firmly located within the econo~icinterests of the white group (and specif ice'ily white workers) cotnbinea with thsir monopoly of political power and control over the coercive instru~entsof the state, The concept of sparthei.3 as a rational econoslic response to objectively perceived constraints will constitute a vital cowponant of the aodel of the apartheid polity to be %eveloped in chapter 4, and we will return to this issue in the next section of this chapter,

While Knight and BcGrat h9s analysis ~ecogn~izesexplicf tlp the i~pottancr? of political power and individual rationalitJ (utility aaxiraizing behaviour) to an economic explanation of apartheid institutions, it is primarily a model of income distribution (or, sore speciffcally wags and job discriainatfan in the labour ~arket)and is accordingly limited in its scope,

Wowever, attempts have been asae by econoieists to construct more general explanatory ~odelsof the South Rfrican apartheid state and the political system as a ahole, An faportant contribut2on in this respect is that of Porter {1978), who Aivfdee the aSouth African typew ecsnaw-y into three sectors: (i) the black reserves, where black labour is the only input and its marginal product is equal to its average product; jii) white comercia3 agriculture which uses black labour and white-owned capital as the only factors of production; and fiii) industry, where wbite-owned capital is coafiined wf th both black and uhite labour, Porter then @a kes the f undaaental assuaption that the South ilfrican type ecanosy is essentially a snarket econosy with the sarket constraints and palicy paraweters aeterained by whites and for whites, The South African state is thus of a distinctly predatory nature, and is therefore charactehizea by the inevitable contradiction between sacfal Froduct and the welfare of the ruling group (see chapter 2, section 2,2,4), It is this contradiction that has led to the popular view that apartheid policies are in sowe sense Wirrationalm 3113 non-economic in that they do not 31~3~spromote economic ef f fciancy,

In Porter's soaef, the inconsistency between saxiwua societal output an3 aaxisus rulerst rents is ~anifeatedin the fora sf conflicting objectives on the part of different sub-groups within the uhite group, SgecificaZ'Ly, white capitalists identify their interests with maxiauw output and economic efficiency, which ~aximizes the return to capital., nhite labour, on the other hand, is concerned with aaximizinq the growth of white eaployaent relative to black employ~entan4 increasing the grouth rate of the industrial sector relative to the agricultural sector, Thus the South African state nrust not only strive to aaxi~izetotal uhite inco~e,but also to redace the level or growth of black e~playaentoutsine the reserves

(this: policy is what Porter refers to as mapartheid*) and to promote the growth of industry (which in turn facilitates a rapid growth of white eaployeaent opportunities) (Porter, 7979, p, 7a93, In order to achieve these diverse goals, the state uses political instruments to ~snipulatesuch variables as the white an3 black rage rates and the share of jobs reser~edfor whites,

Even if the white population were suf ficientlp ~snalfthic as to seek no goal other than the saxid.zation of its own total income, the process of achieving this goal would not Be straightforwar9 if the desire to discriainate aqainst blacks is taken as a given, ne hare seen this clearly 4e~anstratcRin

0ecker3s &ode2 of discriaination as a form of econswic segregation, in which the separate *sectorsn (one vhite an4 one black) engage in trade (Becksr, 1957; 1976). In a aiscri~inatory eqaif ibriua, the net incaaes of both sectors are reduce?, although the returns to whits labour and black capital actuall~

------*increase Thus capitalists from the dominant group (contrary to mdarxist and other radical views) will 1124 benefit frow plce jadice and discriaination in a coapetitioe capitalistic economic system

(Becker, 1976, p, 19). "En Porter's wodel OF the South African type economy, aaximization of total white income requires a noa-discrieination equilibrium a la Becker, which is consistent with econoaic efficiency, If identical factors of production were priced identically, the private cost of factors would equal their social opportunity cost (Porter, 1978, pp, 747-748) ,

Rowever, there is a tradeoff between white workers* income 3nB uhite capitalistsq incoae which reflects the tradeoff between the econsaically efficient allocat ion of resources an3 that which is wpoliticallgw optimal, Porter refers to this dfleaaa as the nlti~ateparadox of white policy: nawely that the demands of internal politics evoke a rhetoric sf "separate developanentn. while the continued expfoitatian of blacks requires their integration (1979, p, 754). Direrqant goals araong the Bifferent sub-groups within the white sector become even more pronounced when the apartheid state also attarapts to promote the growth of the industrial sector relative to agriculture and to restrict the aobility of blacks between the reserves and the capital5st economy, For example, an increase in the white wage rate Bay appear to benefit white workers, but it wiI.1 also reduce. the ratio of industrial to agricultural. ontpul, reduce white industrial eaglopaent and reduce the rate of return to industrial capital (Porter, 1978, p, 750).

while Porterf s nodel successfully characterizes a number of aspects of the South Rfrican state - especiaZ3.y the conflict between economic efficiency and apartheid policies - it does suffer froa several major shortcomings, For exaaple, Porter 3oes not distinguish between aifferent skill categories of white and black labour, but treats a11 labour as homogeneous, This is unrealistic in the light of the fact that such discriminatory practice takes the furs of: restrictinq the access of blacks to higher levels of education (Knight, 1968, p, 294). Porter postnlates constant returns to black labour in the reserves, whereas the historical evidence points to dieinishing returns as the land constraint has becoae progressively mrc binling

Lundahl, 1982, p. 1171). In addition, forter*s ~lode2 is axplicithy ahistorical, in the sense thst it does not provide an

explanation of the historical evofntion of aparthe23

institutions, Pn an attmpt to remedy these proklems, Lnndahl

(1982) develops an analysis of the "South African typeu econoray

in which he distinguishes be tween skille3 and unskilled labout, endogenizes the wage rate snil divides the history of the economy into three stages. The first stage runs fro* the initiation of colonial contact until the discovery of minerals, During this period the aconoay is iaivided into two sectors - white and .black agriculture - and the white group uses the political instruaents of land alienation and European iaaigratian policy in order to ~axieizewhite incanes, The second stage consists of the period

fro& the discovery of rninerals to the end of the Second Hotla gar, during which bath black and white labour is divided into skilled and unskilled categories, The white group aims to

increase white agricultural output, inausttial output, the

rental rate on white-owned agricultural land, the rate of return on capital in industry, and the skilled and unskitZed uhite raqe rates, Their policy insttusents includa land alienation, job reservation, an3 control over the aaount of skilled black labour eapfoyed in induattp, Laain, these qasls are not mutually consistent, For example, in order to solve the *poor white* probles, the so-calleii *civf 2imd Zabour policye (essentially a system of job reservation) was adopted to raise the level 1.f erplopeent of white unskilled labour, Howevet, the pursuit of this policy was detrimental not only to blacks, but also to indust~ialproducers and skilled white uor kers,

The third and final staqe identified by Lundshl is the post

Mar period, by which tiwe the final division of land between

blacks and whites has been establishe4 (so that land alienation ceases to exist as a policy instrueent) an3 unskilled whites no longer coaprise a significant component of the labour force, The white group aims to eaxi~izethe saae objective function as in the iawediately proceiling period of develapment, except that now the onlp policy instruments available to it are the nnntber of black skilled workers ewployad in fndnsttp and the nuaber of black workers allowail to aigrate into the white sector of the economy fro@ the reserves or "ho~elands*~,Once again, conf lfc ts of interest arise between subgroups within the white sector, Lundahl in fact arrives at the same basic conclusion as Bortet - namely that the achievewent of maximum incolae for the white group as a whole would be facilitataR by increasing the influx of blacks •’row the homelands to the **whiten econoay, yet the policies of apartheid or *?separate citevelopment** have aim4 at

just the opposite (Lnndahl, 1982, gp, 117 7-1 178). Lundahl therefore draws the conclusion that any explanation of aparthei3 must be non-econoaic:

.,,it may thus vary we11 be the case that the root cause of the segregation of blacks •’SOB whites shaald not be sought in econo~ic rationality, ,, (lundabl, 1982, p, ?tfR),

According to lundahl, the economic mperversitym of apartheia can onlp be coaprehended on the grounds that it achieves such supposedly **non-economic* parposes as reducing political snR social turaoif and increasing the security cf whites, Cthers have claimed that the netho3 of neoclassical economics is inherently unsble to provide an explanation of apartheid practices, For example, Knight and Lenta write: Vtility-maximization atode1s abstract from the ~ost important determinants of (labour) migration, These are to be found not by exa~ininqthe logic of in3ividual choice but rather by explaining why people face the choices that they do, This teqnites a study of the historical evolution of the labour reserves, giving proainence to variables which are conventionally regarded as exogenous and qf ven (f9R0, p, 195).

Bowever, we will argue that it is possible toaccount for

apartheid institutions without violating the principle of

individual rationality if we incorporate these so-calle4 nnon-economicm factors directly into the individual decision making process in the fora of transacttons costs associated with

alternative structures of property rights, We will follow Varth

in treating the costs of enforcing and ~aintainfnga particnlar

assignwent of rights as an iwportant constraint upon the ability of the mling group to achieve waxinurn societal output (see chapter 2, section 2,2,4),

&21 g&n %!~~~s!~&~ sf 4~zrkheig$~~~~~~&~"~~ Liberal economists, historians an3 athst social scientists

have traditionally argued (in the spirit of Jeremy Benthar, J,

S, 3ill and 9dam Smith) that free scono~ic competition is sn

essentially equalitarian force, an3 that the wai ntenance of dirigiste state policies designed to discrininate against one

group in favour of another is indicative of econoinic irrationality in the sense that it results in a less than optiaaf allocation of resources, The aost influential proponent of this vieu within the South African Iiteratnre is Butt (19.56),

he lesson of history, explained by classical economic nalysis, is that disinterested ~arketpressures, under he prof it-seeking i~ducement, provide the only objective, systematic liscipline that would dissolve traditional barriers and offer opportunities irrespective of race or colour (p, 73).

Xn a ~uftiracial society, according to Hutt, the market is colsur-blind, an3 it serves to dissolve custaas and prejudices which wonld otherwise restrict the ability of the underprivileged to contribute to, an3 share in, the comtaon pool of output, fn fact, Hutt argues that the a3rancerent of blacks which has historically occurrea in south Africa has been the result of I&aite3 ~iCtbr%@sof the "profit incentive" aver interventionist, collectivist qotrernntent policies (136U, p, 91)*

These policies are the outcoae of atavistic wcolout prejud ice3*, nhich in turn 3erives fro3 an historical heritage in which blacks traditionally were "sore prisltive* in their behaviour patterns and occupied low positions in the sconowic and social hierarchy, The perpetnation of this prefu4ice into the sadern era is, according to Hutt, directly attributable to the natarc of Afrikaner social psychology, and particularly ~alvinismwhich

Butt maintains is intrinsically opposed to the Wapitabist spitit* and is based on a fatalistic respect for historics%lp detereined (and theref ore heaven-ordained) race and class structnres, This attitude leads to cconoaic race discri~inatian and injustice, which in turn reinforces the survival of

prejudice (Hutt, 1964, pp, 30, 44). 8utt1s work has prove3 to be extreacly influential:

Rost ~ajorstudies on South Africa reflect the assuaption that an essential contradiction exists between an irrational race ~olicyand the requireaants of a rationally organized, expanding Lnilusttial society (Rdam, 1971, p. lbi5).

&' The irrationality of apartheid implies that it imposes severe costs on the econoaty, The liberal school lnaintains that apartheid is inherently inco~patiblewith econo~icgrowth (ie, it reduces the growth rate below soBe hypothetical *potentialm

which presumably coufd be attained in the absence of a11 I ' apartheid institutions), Recording to 8ongbton (l913), apartheid serves to enrich the white aiinority, but at the expense of

*econonic progressn, In his words: . white voters have used their aonopoly of political power to entrench their econo sic position bp restrictions on the wovesent an3 ailvancement of African workers bp aaintaininq diff etentials in educational opportunities and by Zegislative methods to give the whites a monopoly of certain kinds of jobs, These contrived scarcities and im~erfsctions in the labour ------I ------aarket ----have p zeggcig&~2 gff~gg~JOE gsonoatic gggm&L EQ~ prevent optigm~gesoattcg dJggpm_o_n {Moughton, 1973, p, 252, emphasis added),

Sinilarly, Horvitz argues that the white qtoup, by virtue of iis

sole possession of the franchise, was historically able to use its political power to sntrench its econawic ascendancy, even

though by doing so it was seeking political institutions that would retard South RfricaSs future development (Horwitz, 3'367,

g. '3). Be regards South 9Erica9s econonic history as essentially one of conflict between the dictates af the econosy on the one hand, driven by the needs of a growing capitalist systea, and the polity on the other, driven by the iiieology of white supremacy and Afrikaner naticnalism (Hcrwitz, 9967, p, 299;

Nattrass, 1982, p, 72). A corollary to this approach is the view that any sustained economic growth which is allowed to occur will autoaatically attenuate the eff activeness of state restrictions and irrational ideologies, Kt is claimed that growth alone can play a role as a liberalizing elewent, as whites trade off political supreaacy considerat ions in favour of increased prosperity (Broaberqer, 7974, pp, 70-71; lattrass,

3982, p, 31)s The liberal perspective is valuable in so far as it draws attention to the (not inconsZderablef efficiency costs of the apartheid systea. These casts play an i~pottant tole in the

@ode1 presented in chapter 4, and niZl he discussed in greater detail there fsee section a. 2). To the extent that apartheid consists ptiaafilj in state regulation of the labour aasket in the interests of a sinority group of participants in that market, there can be no doubt that it does result in a redaction in output consequent upon a misallocation of resources, It 2s more useful, however, to treat the individual decision @aketts choices as rational responses to econosic constraints rather than ascribe to him an irrational set of bahariousal noms which would not be susceptible to economic analysis,

In any case, it is bg no aeans clear that the application of apartheid policy has always been aetrbs~ntalto the growth of the economy, Warxist authors argue that apartheid is nelther inefficient nor irzational since it has facilitated an increase in the rate of exploitation of tlack workers in the interests of rapid capital accuaulation (Volpe, 1972, pp. 235-2361, Accor3ina to the narxist view, race discriaination VBS Both introduced and fostered eyer the past century precise1y because it was high1p functional to economic proqress through the capitalist aode of

Contrary to Rorvitzts contention that the goals of the polity and econoaay are fnherentlg opposed, the naxxfst literature maintains that the expandinq capitalist sector of the

South Rfrican econoay has succesfn3.ly used the polity to reinforce the position of the capitalist class, and that the creation of a %bite worker elitew shoul3 be regarden as a by-product of this fusion of the econonry and polity (aattrass,

3982, pp. 32, 13). It is also pointed out that South Africa has enjoyed an extredae3.y high rate of econo~icgxowth since 19Qu

) despite the

ation of apar ol3.cy (Legassick, 1974, p,

-* 6). The existence of this apparent contradiction is often attributed to the flexibility and pragmatism displayed by the

South Lfrican state in its enforcement of the policies of apartheid, Houghton himself observes that "in per ioas of rapid estrictions on nan-white eraployaent tenS to be relaxed he need to maintain outputm (7973, p. 1513. _ " * - Xn such boom petiods, black fit fraa some upnard occupational aobifity, aaving into skilled jabs vacated by whites, Woughton suggests that the rapid growth after the Second ldorld Uar was only possible because of *a tacit relaxation of restrictive practicesm (1973, p, 753). 8 similar point is ma3e By Borwitz, who maintains that the very arbitrariness of industrial relations legislation necessitated that provision be aade for the granting of individual exemptions from certain sinisterial orders (1967, p, 329). According to Rhoodie and

Venter, it is iaportant to distinguish between the "apartheid idea", which they define as the ideological basis of the

Afrikaners' racial philosophy, and the actual measures of apartheid policy through which the fun6aaental principles of the apartKeid idea are crystallize3 in the for8 of statutes, regulations, etc, (1366, pp, 21-22), Since apartheia policy is the practical, concrete expression of the ideology of aparthein, it is also likely to aispfay greater ptagastis~,7 ------*------?R clear illustration of the flexibility with which aparthei? policy has been applied is evidenced by the fxuctuating nuabar of aidiwum wage deterainations issued by the statutory wage Board and the number of fob resevation deter~inationsmile in teres of Section 77 of the f ndustrial Conciliation Rct of 1956, (For a more detailed description of apartheid legislation an3 the pragmatic evolution of apartheid institntions, see appendix 2.) The absence of any active policy on the part of the wags Board from 1949 to 1957 Mas indicative of an atteapt by Nationalist politicians to suppress effective black varksr organization, Over this period black real wages fell by 1%. 3ut froa 1957 to 1959, the number of Wage Ward dcter~inations fncreased drasatically and black real wages rose by t2X (Griffiths and Janes, 1980, p, 101). Section 77 of the Industrial Conciliation Bct has also been applied in a pragmatic fashion, Adas waintains that the traditional innastrial colour bar coold only be sustafned by aeans of larqe-scale exceptions (1971, p, 149). The qovernnrent itself has claimed that the job resewation determinations nndar section 77 af the 1956 Act were intenaed only to provide for *orderly change* within the labour force, It was envisaged that these determinations would gradually be relaxed to allow black workers into occupations It will be shown in chapter U that it is possible to

construct an explanatory no3el af the apartheid state which is

founded on the fundamental econonic assuwption of rat ionality on

the part of all agents, Political interference in the operation of markets is generally aost dettisental to the Least favoured

groups in society (~eisetz, 1355). IR South africa, the aonopoly of political povee has histosicallp enabled white workers to extract rents in the form oh high uaqes and secure esployment by

hatnassing the instruments of the state to their cause, "To protect their wages white workers have an interest in erecting

and maintaining barriers to Black entry, whether they be

barriers to education or training, or statutor~or custaaary jab

reservatian* (%night and YcGrath, 1977, p, 262). According to

Broeberger, apartheid consfsts in an attsnpt to protect the unequal distribution of wealth that has been created historically an3 the resulting distribution of income, which is

at least partly aependent for its preservation on legal and ------conventional restrictions on labour coapekitiun (39713, p, 105). ? (contQd) vacate4 by upward-mobile whites, and that the racial labour pattern would be *unfrozenw in an cooXutionarp Banner, Where the practical enforcaaent of a proclamation presented difficulty, exemptions were readily granted to indioidnal firms, occupations or geographical regions, far exampt e, aur ing 1971, 1,776 exeaptions were granted, covering 4,686 workers (Grif f iths and Jones, 1980, p, 171). A further indication of the flexibility of the apartheid systelrm, is pro~idedby the bseak3own of euch of the statutory job discrimination in 1978-79, This occurred priaarily as a result not only of the gooernwentvs desire to appease black aspirations in the wake of the 1973 strikes and the 1976 Sorseto riots and to yield to internationax pressure (in the fora of threatened tra4e boycotts, sanctions an3 disinrestaent), but also as a result of severe skillet3 Banpower shortages (Eriff iths and Jones, 1980, p, l86), Public choice theorists have shavn that political pressure to

institute an ascriptiae an3 ineEf icient qavernsent pol%cy that

creates benefits for a particular privileqed group imposes a

cost that is diffused over the entire population. If the gains

fros such a policy are concentrated uoon a relatively saall

6 nuaber of beneficiaries, a great deal of resources will be

allocated to securinq its initial adoption and lobbying aqaikst

any proposals favonrinq its abolition (Lee and Orr, 1980. DP.

qltt-I?5), .

The white group does not coaprise a ~onolithicpolitical entity, however, since the interests of white employers are not necessarily consistent with those of white workers,

Specifically, eaplopers can be eapecte3 to favour the reaoval of

artificial barriers which raise white earnings, and to press far

the pagaent of market wage rates and the advanceaent of blacks

into skilled jobs (Knight and BcGrath, 1977, p, 2631, white e~ployersare in co~petitionnot vith black labourers, but with

other (often foreign) producers, an4 thetef ore it is onlikely

that esplayers, as a group, have ever comprised a principal source of the racial exclusion and discri~inationsuffere3 b~

blacks (Ofson, 1952, pp. 163-764) ,* The complex interaction

betveen white worker and eaployer interests will be gade Bore explicit------in the fatsar faode1 presented in chapter 4, 8It is conceivable, however, tbat employers Hay voluntarllg con•’ora to stateaents of ofhic2al govern~entpolicy and maintain discriainatory practices even when not statutorily required to do so, in order to avoid offending and provokinq their white employees or the government (savage, 1971. p, 292). As pointe3 out i.n section 3-2 above, the conca~tof

%thnicity** and "ethnic wobilizatian* aclvanced by Adaw an3

Cilio~ee (1979) provides a useful socioloqical backdrop to the analysis which will. be undertaken in the following chapter, since it is colapatible with the type of approach to be used, Accordfag to this perspective, a honrageneous ethnic minority

(Ifr ikaners] within a heterogeneous society organizes its political and social identity in such a way as to capture the aaxi~ua share of resources, Rda~and Gilioaee describe in soae detail how, historically, lifrikaners were effectively ~obikized as a group (irrespri3ctive of class divisions) by an ethnic oligarchy of Rfrikaner nationalists, This aobllization was achieved by def iberately developing an awareness of coawon language, cultaral heritage an3 other manifestations of *volk identityw in order to generate a perception of nethnic belongings* strong enough to breach class and occupational lines,

The purpose of the nationalists in this enaeavour was to ensure survival of the Afrikaner group and its security, Accotding to this siev, ethnic identification, or racism, eaerges out of the efforts by an underprivileged group to isprove its position through collective mobilization or, conversely, the efforts sf a superordinate group to preserve its privileqes ky exgloitrnq subjected groups, nIn short, raciaZism is sn expression of specific interestsn (Rdaa, 1977, p, 20). Thus race prejuaice promotes group cohesion and prevents any dilution of group eewbership in order to facilitate successful collective action One of the ~ostieportant outcomes of this mobilization process in the Soath African context has been the increased economic strength of Afrikaners, indicate3 by the growth of inaiganous Afrikaner capital holdings in mining ant! atanufacturing, 3s uell as the capture of the state bnreaucr3cp by Afrikaners (OS#aeta, 1973, pp, 376-179; 3das and Gilio~ee,

197 9, pp. 8 3- 127, I-1 Divergent economic interests continue to exist uithia the white group, however, and even within the Afrikaner subgroup, The latter now contains "a ~ature

Afrikaner bourgeoisien which identifies itself with the laissez-f aire labour policies of English speaking capitalists, with whoa it shares sisi2,ar interests in -curbing the historical monopoly of expensive white labourw (Adam and r;ilioraee, '1979, p,

182)

The costs as well as the benefits of apartheid institutions need to be considered in order to analyze the nature of social change, The rising costs of ptivfege maintenance vgmust not be calculated only in narrow financial terns, Tn a wider sense, costs result from threats and the precautionary defense of a systasn (fldaa an3 Giliontee, 1979, p, f), 'Phe relationship is not of s "zero-sua* nature: if costs are rising for the ruling group, it does not Bean that they di~fnishfor the subordinates whose militancy has its own cost structure, Oltimataly, ------apartheid remains a viable social spsten only so long as its 95ee section 3,3,1 above. benefits to the relevant decision makers exceed its costs,

In the next chapter we rill treat the apartheid system e~plicitlp as s rational response to strnctura?. exigencies, rather than as a manifestation of an irrational, atavistic racis~, Xn doing so, we are following the spirit, if not the method, of such economic analyses as those of Knight and EcGrath

(19733, Porter (7978) an8 Lundahl (1982$, as well as that of the sociological concept of ethnicity as proposed by Adam and

Gilioree (1979). The latter authors point out that, although

~uchof South AfricaBs recent econoaic history appears as the subjugation of laisssz-f aire econowic policies to the ideological designs of Rfrikanerdom, yet a more thorough iri~estigati.on reveals that "a rational calculation of ethnic interests rather than ideological zealotry nnderpins the exercize of power by Afrikaner natioaalistsfl 17979, p, 123). Tt is with this vfev in %in4 that ne proceed in the next chapter to suggest an econosic m3el which is capable of reconciling the principle of individual rationality with the existence of apartheid institutions, .&If. .&,t~&s:i,onr &gngg&g&gas 2 gationz& &agosic %=mggq we hare seen in chapter 2 (section 2,2.3) that a necessary precondition for the evoXution of de~acraticconstitutions alonq

the lines suggested by *contractariaaa theories of public choice

{such as those exewplified by Buchanan and Tullockrs analpsis of

decision rules or Ravls* conception of justice) is that there be

no clearly predictable bases for the fatration of permanent

coalitions, Thus Buchanan and Tullock concede that their so4ef of the constitution-saking process

,,,has little relevance for a sacietp that is characterize3 by a sharp cleavage of the population into distfnguishable social classes or separate racial, religious, or ethnic graugings sufficient to encourage the foraation of predictable political coalitions and in which one of these coalitions has a clearly aii~antageous position at the costitutional stage (t965, p, SO).

A situation mag arise in which separate classes or interest groups are so solidified that no mdemocraticw constitution of

the Ravls-Buchanan-Tullock type can be expecten to be chosen for

the co@aunity, Tn the case of South Africats *racial autocracyn,

Ada~ (3982) ntaintains that the deqree 05 political integration

which has been achieved in the first instance is so small that the state apparatus does not aia at ensuring administrative rationality but rather "ethnic privilegeff, Tn fact, Adam categorizes the South Rfrican state as an "ethnic statew, which differs in its characteristics fron both a classical liberal state an4 a rarxist class state: For the ethnic state, legitiaacy concerns are reauced to self-preservation, What furthers the ethnic group in power is legitimate, what risks its heqewonp my not be entertained (Adaar, 1982, pp, 2-3).

In the tcreinofoqy of chapter 2, the ethnic state is essentially a predatory or *interest groupw state, fts chief purpose is to waximize the utility of the ruler or the members of the ruling group, As pointe3 out by lorth (1981, pp, 30, l6n). this goal will not necessarily coincide with that of ~ffaximuta societal output or econoaic efficiency, because of the existence OF positive transactions costs associa tea with enforcing, aonitoring and policing alternative systems of property rights,

These costs are an i~portantconsideration in our analysis of the particular institutional structure which has eaerged in South Africa in response to the objectives and constraints facing the ruling group, Xn order to obtain co~pliance, the ethnic or predatory state aast cxercize power legally:

drbitrary terror would increase the costs of coercion and motivate mare resistance (Ada@, 1982, p, 3f,

It is necessary at this stage to nran a sharp distinction between the concepts of political npovern and politicaZ

*autho~ity~,Power wag be defined as force vhich is exetcized through the ~edium of law and with its sanction, Authority is paver which is endowed with sase for@ of legitiwacy and is perceived as such by polf tical agents. 1 The South W frican ethnic state aay he regarded as maintaining its rule illegitiaately (at least in the eyes of the aajority of its black subjects) with the use of la%, In other words, although it is not perccfved to constitute a legitfmate political authority by the aajorfty of its citizens, it does operate within In elaborate institutional infrastructure of legislative and judicial conoentions. This spstela in turn say be treatec? as a rational response to the costs ant3 benefits associated with various alternative allocatioas of propert7 rights, We use the tera "aparthei3 polityw as a sumaary description of this highly coaplex and continually evolving institutional fraaeuork, and it is the development of this set of institutions with which we are co~cerned,

An extreaely popular bat aisleatling view of aparthcii! is th3t it is nothing but an *institutianalfze4 irrationalityw or the npursuit of an ideological dreaaR [ARaat, 1982, p, 12)* as pointed out in chapter 3, %stany historians and social scientists of the "liberaln or *classi~al~schoof have regarded aparthei3 ----I------1Tn a situation of nforcaw, individual R achieves his objectives in the face of Bqs nancoapliance by stripping him of the choice between compliance and noncaapliance {ltukss, 197tr. pp, 17-18). Pluralist poXitical theorists regard mpouerm as synonymous with *coercive influencen, Xn other uords, power consists of Ass ability to induce B to do something he vauld not otherwise do bv pro~isfngto wake hia better off than he is now or threatenin9 to aake him worse off (Dahl, 1963, p, SO), Political. authority is exercized when B coaplies because he rec~qnizesthat B*s coasand is reasonable in tetas of his own values - either because its content is legitimate and reasonable or Because it has been arrived at through a legitlaate an3 reasonable procedure (Lukes, 1974, p. IS), as an atavistic, itrational body of doctrine whose sotivations are explicitly non-econoeic (and are indeed directly orthogonal to any concept of econorlric efficiency) , 9ut we have also note3 that there exists no stronger testison? to the fatlacy of this view than the ext~eae pragmatism of the apartheid state in response to changing econamic constrsints. Phe very concept of ethnicity has demonstrated a great 3eal of flexibility an4 is subject to continual sedef inition in accor3ance with the ntactica2 needs of the powerhaXdessn fRdam, 1982, p, 3).

We aust now ad3ress the question as to hou the apartheia polity can be explained as the outcoae of individual utility aaxiaizing choice processes, We have alreaay established that any such explanation ~ustbe premise? upon a preaatory or interest group theory of the state since the contractarfsn apptoach by itself is not consistent with a hiqhlp polarized snd heterogeneous citizenry, Since our aodel is concerneq on17 with the period after 19'48 i.the period iaaeaiately follouinq the foraal establishwent af the apartheid systaa), va are not directly concerned with the circu~stanceswhich originally produced the divisions Between black and white, an3 thus prevented the devsfopaent of an integrated mnonracialff society, Novever, it is i~gortantto our model that ue be able to characterize the manner in which the ruling group benefits from the existence of the apartheid polity. Therefore, it will be helpful to discuss briefly the economic forces which helped to shape the long history of pra-apartheid segregationist policy in South Africa, and to speculate upon the reasons for the original eaergence of a racinlly dichatoaized society, lhronghout its history, Sonth African coanrefcia1 agriculturaf and rininq production have been plagued hp a shortage of labour relative to land (%ilson, 1971, pp, 177-1391,

This @as true of the British colonies as well as the Boer republics of the nineteenth century, and continued well into tha period of TJnion (Hsttrass, 1982, p, 6rj),E ?!he existence .of a viable and flourishing black peasant agricultural sector Sean* that hLgh wages were necessarp to bring forth the require4 anrount of labour, Tt is a well docustented fact that these wages were considerably reduced by using the coercive political instru~ents of the state to generate 3 labour force for the co~aercial,farming and sining sectars (flutt, 196U, g, 49:

59) = *-*------*--- zitoughton points out that even in the early days of the first Dutch settlement at the Cape, there was an acute shortage of labour induce4 by the reluctance of the Rottentots to work for the white settlers, This shortage led to the introduction of slavery at the Cape [Houghton, 1973, p, 2). Tn the subsequent periods of white territorial conquest and settlenent, Lfticans were forced into circu~scrlbe?areas, while the regions occupie? by whites were characterize4 by abundant land and capital and scarce labour. This situation of labonr shortage continued into the twentieth century, an4 was so acute ilaraediately after the Anglo-Boer War that Chinese indentured labourers were isported in 1904 in order to facilitate the expansion af gold output (%oughton, 5373, pp, 23, 145). sgarly exaaples of such legislation were the hut taxes impose3 on Africans living on Crown Land in the colony of natal in the latter half of the nineteenth century, and the Glen Gray Act passed in 1899 by the Cape warliaaent which imposed a labour tax This practice was not Zimite3 to South Africa, but was comnsn

throughout colonial Africa, A combination of tax policy and direct land expropriation effectively ai~inlshe3 the African's ability to engage in subsistence or peasant farming ffeidaan,

1973, p, 562), labour coercion can take nuarerous foras, of which

slavery is the most extreme, In all cases, legislation is used to force labourers into a different pattern of labour farce

participation than they would undertake if their options were

labour is aost likely to arise in *frontier econoaiesn where

land is so abunlant as to be effectivelg ufteem, and labour is

relatively scarce, In such a situation, landowners must impose restrictions an the ~obilityof laboar in order to obtain rents ------3(conttd) on African resfdents of the Glen Gray gistrict, The first instance of land being set aside exclusively for black occupation was the "native reservem established by Sir Barry Saith, governor of the Cape colony, for the nfengu cosmnnitp, Natal was quick to follow suit, and by 1549 seven African reservations had been established in that colony (Wattrass, 1982, p, 190). The 1913 land Act end& the spsteln of squatting and share-cropping by Africans on white farm, reducing both groups to the status of labour tenants ant! formally institutionalizing the policy of racially segregated land ownership rights, This act, together with the 1935 Santu Trust and Land Act, Ziaited African tights of access to land ta some I5 aillion hectstes, or 19 percent of South Africats total land area {lattrars, 1982, pp, 73, l!l?-l92), The perceived need for state intervention in the generation of a black labour force became even aaze acute after the aiscavery of ainerals, Labour comprised a wajar proportion of the total praduction costs of the gold rines, Increases in wage rates could not be passed on in higher output prices becanse these vere fixed by the wstl3 aarket, and capital costs vere likewise detersinad exogenouslp by supply and 3aaand con3itions in worl3 nonag aarkets, Thus aining entrepreneurs had a strong interest in pressuring the political authorities to eaplop any mans possible to prevent wage costs frora rising (IXattrass, 1982, pp, 66-68), fro@ their land, In other uords, the existence of free lan? implies that there Is an incentive to ensure a labour supply bp restricting potential workers fro^ entecgng into self-sufficisnt production, Rather than cospetkng with each other to attract workers, landowners will enter into soBe sort of cartel agreement:

The cartel response is a set of institutional arrangeeents permitting forced labour, and it is igportant to exa~inethe ability of the cartel to form and hula together, as well as the nature of the political spste~which peratits these institutional Pnno-vations to be enforced (Engerman, 1973, p, 59).

The pre-industrial South africnn state represented the interests of just such a cartel, African Land riqbts and agticultnxal policies were shaped in such a way as to maximize the flow of black workers to the (white) commercial fatming and mining

The rate of investasnt in a Lewis-type "dnal econowpN is determine4 by the supply price a€ labour which is transferred front the subsistence sector to the rnodern sector, an3 fig the price of food and other agricultural proiiucts vhich are used as inputs in the modern sector, Increases in rural proRuctioity will result in increases in the aodern sector real wage through the effect on the suaply price of labour, and Ray therefore reduce------_----- the rate of industrial growth,* *It has soaetiaes been supposed that, in order for total subsistence ovtput ta remain unaffected by the vithdraval of labour to the modern sector of the econorup fie, in order for s true wsurplus labourn situation to prevail), it is necessary to assuae that the sarginal product of labour in the subsistence sector is zero, Sen (1965) shows, hovevet, that, in a coapetitive- mo3al of rational labour allocation, the existence gattrass maintains that a straightforuar3 Levis model of this type is not applicable to the South African case because 6% the success of white agricultural interests in 3ichoto~izing the agricultural sector on the basis of race and thus separating the sources of supply of food and labour. Once agriculture H3S divided in this way, living standards of those supplying foo4 (white faraers) could be increased along with living standards in the industcia1 sector without affecting the supply price of labour nsiqratinq from the black reserves to the cities, Conditions in subsistence agriculture imgtove3 in the fate nineteenth century, but declined again in the early twentieth century, Output in these areas virtually stagnate3 after 1924, and once apartheid laws affecting the aobi1i.t~of black labour became fully operational, real inca~ein the reserves began to decline to the point that they became net importers of food from the white agricultural sector,

At this stage, even though the aaintenance of the labour reserve sector was no longer castless to the growing iaodern econoap, its continucd existence still exerted a dovnvard pressure on modern sector wages, to the e~tent that the sector was able to provide social security in the form of ho~esfor the young, the ages, the sick and the uneaployed, which would otherwise have to have been ------provided by the industrial sector {Battrass, 1982, p. *(canted) of surplus labour requires only that the ~arginal utility of income and the sasginal disutility of work both ks constant over the relevant range. Tkfs rill ensure that the real labour cost is insensitive to a with9rawal of a part of the population, If some peasant output is aarketed, the conditions for the existence of surplus labour becoae even less exacting, since in this case a decline in the peasant workforce due to out-eigration may induce a shortage of marketed agricultn~al goods, and the consequent price rhe will produce a positive output response (Sen, 1965, pp, 429, 4374. 280) , Implicit in this argument, 05 course, is the assumption that incoae-earning opportunities for black fawilfr welnbers would be wore limited in the industrial sector than in the reserves, -he Bore unaerdeveloped the reserve econo~ies, the greater the aaount that black workers are forced to resit in order to support their daailies (Enke, 1962, p, Q1). The decline in alternative income generate3 by reserve agriculture nay partly account for the rise in real black wages in manufacturing during the post-war period (Knight snd Lenta, 1950, p, ITQ),

Lt the sawe ti+=, industrial an? labour leqislatfon was designed in the interests of the white workforce. This situation

Ray be regarded as the result of three factors: (i) the existence of an initial disparity between skilled and unskilled wager due to the inelasticity of supply of hnman capital in South Africa and the necessity to import skilled lakour from

Europe (Houghton, 1911, p, 19) ;s ------*---- SHutt points out that white aorkers dewande? a higher reservation wage than their Black counterparts due to the better alternative opportunities available to the^: m,,,knowlet3ge of aininq esplopment opportunities spread in the tribal regions so that, despite the increasing demnd for labour through the beginnings of the gold-sining r3eveloptwmt, a growing inflow of unskilled Africans had by the aiddle 3390s bronght down the earket price for black labour to a small propartion of the rate needed to attract whites, This disparity persisted through the gold-mining era and has lasted (for nun-market reasons) until todayn (Butt, 1954, p, Y9), Rattrass likewise aaintains that the Eoundatioas for the current %nequalkty of racial income distribution were laid in the early days oE diamond and gold faining, The benefits of the diamond sines were unequally distributed, not only because of the relatively high rate of return on capital, but more importantly because of the shortage of skilled labour and abundance of unskilled labour, and the fact that whites possesse3 an alaost total wonopoly of skills (Wattrass, 1382, p, 135), The discovary of gold and the (ii) the intro3uction of closed-shop craft unionts~ aaung the skilled labour force as a result df the strong influence of unionized British inmigrants (Hutt, 1954, F. 59); and (iii) the restriction of the political vote to whites, either explicitly in the case of the Boer republics or i~plicitlp by Beans of property qualifications in the Cape and 3atal {Kuper, 1972, pp,

827-437). The cmnbination of these three pre-conditions enabled the white labour aristocracy to ensure the continuation of its high wages and full e~ployaentky excludinq blacks from skilZea positions. Tr3le union policies such as "the rate for the jobn and strict control over apprenticeship practices served to prevent the undercutting of white wages bp black competition,a

In addition, the white monopoly of palitfcal power enabled white --*------Slcont'd) developaent of the witwatersrand aines further intensified the tendency 'to racial incowe tnequality, nrronr the beginning go13 eining required large inputs of capital and technology and as a result Blacks di3 not emerge either as ~ine-owners or as part of the skilfe3 workforceH (XbiB., p. 156). we have already noted that the expansion of the gold mines was particularly dependent upon the availability of low-wage labour, since both the gold price and the price of capital goo.lls were deterained by world market conditions and were therefore outside the control of the raining co*apanies {Brceberqer, 1979, p, 95). Xn addition, it was the dia~ondand gold mIninq industries that provided an ideal breeBing ground for a trade union tlloae~entdedicated to resist the fragmentation of craft operations an3 the substitution of semi-skilled or unskilled blacks for white workers (Watttass, 1982, p, 155).

6The discrid.natotig effect of =rate for the job", taininiu~ wage laws and other legislative interferences in the labour mrket detives from the fact that these weasores essentially prevent non-pref erred indivtduaf s from of ferinq to compensate discriwinating employers by providing their services at lower wages, mSinca no wage differential can be offered, since no cost can be iapose3 on @@playerswho discriwinate, fever persons who are non-preferred rill be kited for the jabs they seekN [Deasetz, 1955, p, 278). workers to prevent the a%luticn of skilfed jobs into

semi-skilled coaponents, or the training of blacks for skille3

occupations, by imposing 3irect leqislntive barriers (of uhich

the Transvaal Ordinance No, I? of 1904 is an early exasple)

{Houghton, 1973, p. 146). Prior to the Ran? RebelZion of 2922, white labour in the Transvaal regularly confronted nlniaq entrepreneurs who were prfearily intereste4 in replacing high cost whits workers with low cost black labour in order to re3uce average production costs, The rebellion staged by the .white

workforce in 1922 was crushes with the help of gavetnaent troops

{Huughton, 1971, p, 27). flovevet, the 1928 election resulted in

the accession to power of a coalition of white labour and Afrikaner agricultural interests, This "Pactw gooern%ent

introduced legislation which was to farm the basis of the

present apartheir3 systew {!-laughton, 797 1, p, 3O), (See appendix

2 for a wore detailed description of the legislatise instruments of apartheid policy,) Nattrass paints out that:

Had black workers also held the franchise, there is little doubt that Ohite labour would have been unsuccessfiuZ in its atte~ptsto reconstitute itself as a labour aristocracy. Th is also not at all certain that white labour would have ancceefled in persuading the capitalist class to see thea as separate fro% the black, had they not sanagea to turn econoaic defeat in the labour earkst into political success at the polls, The fact that White labour held the vote and black labour did not an3 indeed still does not, has undoubtedly helped to shape the present sttacture of South Africa9s labour aarket (Hattrass, 1382, p, 76).

The origins of geographical separation and the accoiapanyinq rigorous control over labour nobility can thus be attributed in the first instance to the *frontierw nature of the South Xfrican economy and the abilitp of those groups of indivi3usls

possessing a coaparative advantage in the exercize of force to

extract rents from the remainder of the population by means of a

"forced labour* policy. According to de K Pewie t, the nleitaotiv* of all South African history is the contact between black and vhite which began at the eflstern frontier of the Cape Colony in

the Past few decades of the eighteenth century (1975, p, US).

This contact resulted not in blacks beinq ~ushed further into the interior or in their deciaatian by white ai1itar.p. superiority, Instead it took the form of "inaintaining thea within or adjacent to the areas of Furapean occupation, in various guises, as labour tenants, squatters or as inhabitants of overcrowded areasn (Rahn, 1942, p, 49). The subsequent crystallization of this nErontier spiritw has led to the absorption of blacks into the white econaay as a dominated, poLitically powerless labour force,

8s noted in chapter ? (section 3.4), the theory of rent-seeking leads us to expect that political pressure to institute an efficient policy that yiel4s benefits to a specific group will be sore effective the s~alletthe beneficiary group relative to the losing group, This is because the benefbts ate highly concentrated among members of the minority group, whereas the losses are diffused over a larger number of individuals; and it explains both the initial snccess of the beneficiaries in sscvring the a4option of such policies an3 the strong politics1 resistance to their repeal (Lee and Orr, 1980, pp, 134-115). Blsonas theory of collective action prov iRes an analytical tool

which is helpful in explaining the initial emecgence of a

segregated society in south Rfricn, 8 "distributional

coalitionQs, in OZsonts terms, is a coflusive orgbnization

designed to seize the largest possible share of social output

for the benefit of its me~bers, regardless of the resuf tant lass

in efficiency which accrues as a cost to society as a whole, The

redistribution occurs in a sanner analogous ta the cartalization

of an industry (Olson, 1932, pp, OQ-&7), Zn order for ' such cartelistic gains to be preserved in the lonq-run, hawevcr, it

is necessary that a clear 3eiuarcation Between the favoured and non-favoured groups be maintained, Tn the South African context,

any tendency for the black qroap to be absorbed or assimi2ate4

into the white group weald ia~lythat wage differentials could not be waintained and the cartel. rents would be dissipated, Thus any group diffarence (such as race) which facilitates exckusion froa a distri,butional coalition will be advantageous to the members of that coalition (Olson, 19112, pp, 164-lf35).

In general, force an? Npositive inducements** (pri~ari3.p money wages, attractive working conditions, atc,) aap be regarded as substitutable inputs into the production of labour-effort, The rate of snbstitution between the two is determined by cultaral factors such as mates, expectations with regard to income levels, opportunities to spend wages, tastes for consuaet goods, value of leisure, etc. We Bay represent thf s tradeoff by a faeiLy of isoquant curves, each one associatea with a different level of Labour-effort, Corresgondfng to this

culturally deteraine3 set of isoquants is 3 cost constraint or

isocost curve, the, slope and intercepts of which are prescribed

by leqal codes and po'litical and social institutions {Fogel and

Engerman, 19'3Y, vole 2, pp, 155-156)- Rhether a particular

society is characterized by force* or wlou forcen sysleBs

of fahour extraction thus depends on a coaplex interaction of

social, political and econaaic variabXes which Bay be

represented analytically by shifting isacost and isaquant

curves. Although we will not adopt this technique in its

entirety, our aodel of the mode~nSouth African political system

will implicitly incorporate the relative prices of alternative

degrees of social coercion,

aJe noted in chapter 2 (section 2.2.4) that a rnajor ptoblelrt in

non-csntractar1an (or predatory) theories of the state is that

presented by the public goo3 aspect of the benefits obtained

froan group action (north, 1901. pp, 21-22; Olson, 1965, ope

IO5-lO6). lirevestheless, wa may derive soae insiqhts fro@ the co~petitivelrtodels of social decision sakinq review4 in chapter

2 {section 2,2,3) which enable as to circusvent the free-rider

problea associated vith collective behaviour, ~pscifically,we

will follou the example set by the modern theorists of public choice ia postulatinq that the desires of individual political agents are translated into political action through the mediu~ of parties, interest groups, polfticians or bureaucrats uhase om utility functions are specified in snch a way as to ilcpsn3 directly upon the welfare OF their constituents, An interesting application of this wethod is the mo3el of an endogenous gotrernBent sector developed by Prey and Schneider (9979). The governing party is assuae3 to ~axiaizea utility function which depends positively upon the ability of the party to impfe%ent its ideological views, which in turn requires that the party behave in such a way as t3 ensare its awn reelection (Prey ~ind

Schneider, 1979, p. 30). Even if individnal citizens themselves do not have the incentive to engage in politic31 influence-pro4ucing activities in order to alter the amounts of certain public policies supplied by the state, their interests will be taken into account by utilitg ~axiaizingstate or govern~ent functionaries, This vi1% be trne whether the interests of citizens are perceived in the fora of iw~e3iate opposition or only as potential costpetition. The "external costsm (in Buchanan and Tuflock3s sense of the term) intposed on individual citizens by their political entironeent can lean to what Ereton refers to as a adesirr? for redressn: This Wesire for redress* or ?@wand for social an8 political. change will give rise to possibilities of monetary and non-monetary profits and the chances of poZitica1 support which ad hoc political ant3 social entrepreneurs as well as the electen representatives and contendinq political parties will want to reap (Breton, 3974s 95)

It is in response to the desires cf groups of citizens to reduce the -external costsn borne by thea that political parties, splinter groups an3 even ideologies way aerive their taison 3letre (see chapter 2, saction 2.2.3). This type of approach retoaciles the cost and benefit cafculations of private individuals with the realization of political change broaqbt about by non-ruling groups. Tn an application of this ~ethod,

Tulfock has developed a theory of revolution in vhich the revolutionaries are mtivated exclusively by private gain and any public goods that are produced are assuwed to be Bere by-products of this private activitp, fn Aeciding whether oc not ta become involved in political opposition, the individaal siwply compares the net psgoff to Joiniaq the insurgents with the net payoff to cooperating with the current government, flost potential participants will iqnore the pablic goo? cosponent of a revolutionary outcome, It is assuwe3 that the wagnituae of the private rewards and penalties associated with political activity is sufficiently large to outweigh the incentive to free-ride

(Tullock, 1971, p, 92; Wilson, 1973, p, 79; Rueller, 1979, D.

1Q6) 0

North has demonstrated that the predatory state enbodies n dundaaental contradiction between aaximu~societal ontput and aaxiaua rulerse revenue (198 1, p, 10). 3 particular assignlftent of propesty rights vhich is efficient in econosic teras Bay be

Bpoliticalhy insff icient* (Wan, 1992) in the sense )chat the level of transactions costs associated with enforcing an3 aonitoring that set of property rights way not be conducive to aaxiaizing the rents accruing to the ruling group, As we have seen in chapter 3, this contradiction is clearly il.lustrate? in

PorterQs nodel of the w5suth African typen economy (3979).

Altkaugh Lundahl (3982) claim to historicize Porter's model., his analysis of apartheia is not truly "historical* in the sense of providing an endogenous explanation of the evolution an3 structure of the property rights system that comprises the apartheid parity. Like Porter, ha is prevented by the Ziatited confines of his sodel fros accounting for the remarkable flexibility and adaptability of apartheid institutions in response to shlf ting constraints, A truZ y WinstitutionalH explanation of apartheid within the neoclassical gara9iqi~ necessitates the inclusioa of an econowic eodel of gditicaX behavisur which in turn is consistent with a theory of historical change, As pointed out in chapter 2, such an explicitly econo~ic approach to politics requires that the governaental process be viewed as an institutional setting within which persons an3 groups interact to pursue their own ends, regardless of the roles or positions indivi4uals way take, either as aecision eakers or as those farced to adjust behaviour to the decisions of others (Brennan and Buchanan, t980, pp,

13- 141, A21 Ths 4nE It will be assumed for the sake of siap2icity of exposition

that the South Rfrican polity consists of three identifiable groups - nawely, capitalists fuho are 3'29 white), white workers (who are all skilled), an3 black workers, who are themselves

divided into skilled and unskilled categories, Poltowing Zundahl

(39821, we aotivate oar assumption that all white workers are

skilled by the fact that the "paor whiten probles had been

effectively slhinated by the end of the Seconi! World War, so

that a skillel white work force is a reasonably accurlte reflection of the post Mar situation which the present wodel is intended to describe,? Black and white skilled workers 3rc

close, but not perfect, snbstitutas, This Beans that eaploysrn

can distinguish between the two categaries of skilled labour

despite a uniform skilled wage rate applicable to both, Again,

following Lundahf. an4 Porter (l9?3), it will be assused that the

South African economy is fundaaentally a narRet econo@y, with the various fictates of the apartheid state reptesentinq

constraints upon the operation of the narket,

elack unskilled votkers may be ef~ployedin the reserves (or ------t~homelsndsm) or in the (white) industrial ~~~~~~~a Skillea ?Steenkamp points out that the gold boos of the late 1930s an3 the inatistrial ?evelopment after the Second W~rhdWar practically elieinated cyclicaX and structural unemployment aaong whites an4 produce3 instead a vi3esprca4 shortage of skills (1983, pp, 59, 731,

BThroughout the discussion that follows, the term mindustrial sectorn uill be used to desctibe the entire mnadernn or ?icapitalisticH econosy , an3 will thus include the service, trade and aining sectors as well as manufacturing an4 heavy industry, workers (both black an3 white] may only be esploped in the industrial sector. For tha pnrposes of the present mdel, we will not distinguish between vhite coaaerciaf agriculture an3 white-owned industry. UhiEe it is true that the former employs latgely unskilled black I?bour an3 the latter e~ploysbath skilled and unskilled labour, ve can attain a higher degree of generality by coebininq the two into a single (uhite) *capitaf istic* sector which e~ploysblack st illsd an3 unskille?

In order to simplifp the analysis, it will be proposed that the industrial sector produces tuo goods: a non-traded good which is consuaed domestically by blacks and whites, an3 a single export good (repressnte3 by gold, which is South Africa's chief source of foreign exchange),+ The institution of apartheid enters the ao3ef in the form of a state detereined quantity constraint on the nuaber of black skille3 workers eaployed in the industrial sector, an3 a restriction on the flow of black unskilled workers peraitted to aooe from the reserves into the industrial sector, The latter is not a direct quantity constraint on the number of unskilled workers, but is modeled -*------9"Capitalistsm, or esployers, da not cowprise a distinct consunter group. We ma7 justify this assu~gtionby regarding the model as a version of T3ebreuss "private ownership econosyw, in which each itth producer receives the value of his resources, Wi, plus shares of the profits of each of the other producers, Qi j. Thus the wealth of the consuaer-producer is:

J't whete RJ is the profit earned by tAs j*th producer (Debreu, 1959, pp, 73-80). instea3 as a transactions cost in the •’omof a premium oa the

unskilled wage rate which aust be paid bp emglopers. This

assumption reflects the fact that the mobility of unskilled

workers is liwited by a large nu~berOF bureaucratic regulations - including influx control, urban resiaential zoning restrictions, and industrial location policy - SO that the cast of hiring unskilled labourers is ef iectively increased. The restriction on the number of black skilled workers eaployed in

the inaustr ial sector is a d irect quantity constraint, however, since it is deterained by such factors as access to education aad training facilities by blacks, as welt as various types of labour legislation which affect the recoqnition of black trade unions and the job cf.assifications of black workers, (See appendix 2 for a description of the instruwents of apartheid policy.) In this respect ue are again followinq the example set by Lundahl (1952), who likewise identifies constraints on the eepIoy%ient of black skilled an4 unskillea labour as the s~le instrunrents of parth he id in his third stage of developlaent (the post Mar period), by which tiae the allocation of land between blacks and whites has been deter~inedso that land alienation no longer constitutes a relevant tool of economic policy.

Once the state has establLshe4 the desired degree of geographical and skiZl mobility of black workers, the goods an? labour aatkets 3eter~ineen3oganously the skillad wage rate, the esployaent levels of black uaskilled and white skillet3 f abour, the output levels of both the traded and non-tta3ed goods, and the price of the latter, ?ha unskilled black wage rate is

determined exagenousLp by the supply price of black labour in

the reserves, an3 the uorhd gold price is also exogenous, Tt sboul4 be noted that we are abstracting altoqether from capital as an input into the production function of the industrial

sector, This is done in the interests of clarity of exposition

and is motivated by the fact that its incorporation will not significantly alter the results which are of most concern,

The analysis thus far appears to consist of little ' ware than a siaplificatf on of econo~ic relationships designed to characterize the alfocati~e and disk ributirte effects of apartheid, The purpose of the ptssent ade el, however, is t~

provide a basic framework far explaining the historical evolution of apartheid institutions over time. In order to do this, it must include a theory (however simple) of political choice or collective decisian making and at least the rudi~ents

of an economic theory of institutions, kcordingly, re

incorporate a %ode1 of the psedatory state in which politicians, political parties, interest groups an3 bureaucrats are assuae?

to tmximize their probability of surviral or reelection, which

in turn involves waxinizing a utility function that depends upon the atifit7 of each group of constituents (in this case, white skilled workers and white capitalists who are the only two groups to coaaprise the electorate) weighted by their respective

political influence coefficients (which are equal to each groupts share of the total electoral popalationf, Blacks enter the mode1 by virtue of the fact that the costs to the state of maintaining an9 defending the aparthei3 system are inversely relate3 to black utility, This formlation is consistent with much of the public choice literature reviewed in chapter 2

{section 2.2,3), in which collective Recisions are treated as the outcoma of cowpetitive interaction between self-interested

political agents (Breton, 1978; Peacock, 1979, pp, 72-73).

Follouing Dovns (3957) and Tulluck (t9S?bb), it is assumed that the voting franchise within the white group is general and .entry into constitutionahly sanctioned political activity is unrestricted, f t then follows from Rlackes theotea {given the necessary assu~ptionsregarding the nature of individual utility functions) that competition between political entrepreneurs leads to the election of a governwnt that chooses a platfate identical to the opthal position of the nedian voter

(Borcherding and Deacon, 1972, p, 991; nueller, 1979, pp,

40-@If, According to fretanran, it is plausible to assunte that such a government will not 3irectl~ seek to articulate the interests of a disenfranchised group, but will atteapt to mxieizs the income of the voting population, or soRe function of its knco~e (1934, p, 391, This approach is also consistent with Northts conception of the predatory state, where the purpose of qovern~entan3 other state institutions is to effect a redistribution of wealth fro^ the politically pauerless to those who have been able tc harness the statets comparative adoantage in the exercizs of force in order to extract rents for thstaseloes (see chapter 2, section 2,2.@).

The final essential inqredient contained in the aodel is a siaple theory of institutional change, The foasian analysis of property rights and transactions costs, %hen applied to explanation of processes of change in economic history, suggests that choices about institutions can be endogenized in nuch the sawe way as other types of econaaic choices, Rn7 pa~ticular set of constitutional rules or any particular assign~entof property rights is itself the outcowe of a utility aariaizing individual choice, Different transactions costs ate associated with alternative systeas of property riqhts or institutional arrangeaents, and the choice-theoretic approach of Cuasian wicroeconoaics suggests that the tysten vhich ultimately prevails will be that vhich ~ini~izaathe relevant set of transactions costs, and f urtharmore that shifting transactions costs will produce incentives to alter institntions,

The costs of apartheid inclnde bath the direct casts involved in a3sinistering an3 policing the system as well as a loss in efficiency vhich results froa the @isallocation of resources, As an example of the latter, Griffiths and Jones

(1980) identify the various labour market distortions consequent upon statutory job reservation and influx control, which have the effect of lieiting productivity, sti~ulsting inflation an3 diminishing the rate of qrowth, Employers are dented the riqht to hire agp qualified worker, vhich causes inflation of la5out costs and pricss, an3 a loss of foreiqn co~petitiveness*through the necessity of paying *~onopolypremiuas* to sxisting labour coap2eiaents*' (Grifiiths and Jones, 19fa31, p, 771f, In addition, the quality OF rork sap be adversely affected due tothe co~placencyof workers who are protecte? froa corepetition froa other race groups, Thus the existence of job reservation practices serves to reduce productivity and inhibit growth, Tt

Bay also cause uneaployment since the growth of esplopaent opportunities for unskille? blacks is constrained by the growth sf the stock of skilled labour, which is partly politically determined an3 partly dependent on the rate of expansion of the white labour force, Because the nunrber of blacks entering the labour market grows Faster than the number of skilled workecs, black uneaployaent increases absolutely during periods of high economic growth an3 relatively during periods of low growth

(Griffiths and Jones, 1950, p, 2183. Attewpts have been mads to measure the costs attributable to the migrant labour system, which is itself a product of apartheid legislation, These costs include the nigrantts travel expenses, petioRs of unesplap~ent necessitated by periodical retnrn to the reserves, and the relatively unproductive the spent in the subsistence sector

(#oughton, 1973, p, 90) ,so The high labour turnover associated -*------*----- '*In 1955, the Toalinson Coaaission for the Socia-Econoaic Development of the Bantu Rraas found that, of a total annual potential of l,?4 %illion san-gears of labour available in the African areas, only 980,000 were economically used, and of this, only 833,000 were in paid esploysent in the *whitem areas, On the assuaption that the average black aiqtant's home is 500 kiloweters fro^ his place sf work and that the average work stint is 13 wonths, the transportation repuireaent would have arnounted to 310 million trtan-kilometers per annuat (in addition to the normal daily journey to work) (FIouqhton, 13?3, pp, 90-92). with the systew of inELLux control tends to restrict the acquisition of skills an the part of black vorkers, This, together with the discriainatory structare of industrial relations, imposes an inevitable social cast:

In so far as it prevents any Ban froin perforsing a task for which he is coapetent, and confines hiin to one which is less skilled, there is economic waste of scarce resources (Wought~n, 1973, p, 153).

The costs of adainisterfnq apartheid are directly related to the level of black resentment aroused by the spterat and the consequent extent of black resistance, These costs also include the expenditures required to dnplicate nuaerous facilities for the exclusive nse of blacks in otler to appease external criticiss, an? the costs of parchasinq support for apartheid fro% African chiefs and other black leaders,ll According to

Savage ('1977), the costs of adwinistefing an3 enforcing the system of influx control and "pass lawsw include (i) costs of arrests and santronses for pass violations; fii) costs of patrolling and policing; [ii-i) costs of prosecutions; (iv) last production; fv) i~prisonainsnt; fvi) issngng and updatinq pass docuntents; (vii) costs OF labour bureaux and contracts; an?

(viii) aid centres and transit camps, These are only the aost direct and observable of adwinistrative casts. IRa33 ition, account should be taken of the proportion of state spending on national aefsnce, education, foreign affairs and other budgetary -----_------~&ID1962, sose $b00,00Q was alZocated under the category af "allowances, presents and rat ions to chiefs an4 hdadaenn (Pntt, t96&, p, f33n), categories which is attributable to the need to maintain apartheid institutions, A close relationship betveen South hfrican domestic policy and ioternational relations has developed as a result of the granting of independence to a large number of black African states and the subsequent eaergence of a strong anti-colonial and anti-racist lobby in international foruins. The aounting pressure of ~orldopinion against apartheid institutions has forced South Wdrica to devote considera51e resources to defen3ing its 3onestic policies on a vide front: Thus for a small power its representation abroad became extensive ,, Foreign policy beca~e in large part concerned with the atteapt to justify Government policy towards the non-white , {$pence, 1971, p. 503) . The expenses involved in conducting this international defence of apartheid @us2 be counted aaong the casts of waintaininq the systetlr,

Of course, only those costs which are perceive4 to accrue to the ruling group are relevant for the choice problem faced bp that group. e note4 in chapter 2 fsection 2.2.4) that a ndistributional coalitionw exercizinq power through the eedius of a predatory state is not constrained by the level of social costs inposed on the econoap as a whole, since there is no necesarp congruence between economic efficiency and mpolitical efficiencyn (Becker, 1983, p, 376; ohson, 1982, p, 48). The inefficient allocation of resources resultsng fros apartheid does not in itself represent a cost to the ruX.ing group, unless the existence of such inefficiency translates into political resistance or opposition on the part of non-rulinq groups,

Wn econo~ic theory of history or institutional chanqe requires that the econoaist identify the constraints and casts facing the relevant decision makers (the "institutional innovatorsm or 9gpriaarp action groups*, in the terminology of

Davis and North (5970) 82). and then proceed to characterize the eeetgence and evolntfon of institutions as the product of rational, utility maxisizing choice {see chapter 2, section

2,'t). IR terms of the present analysis, kt is necessary to explicitly i3entifp and define the casts involved in adsinistering, defending an?? policing the apartheid spstea, as well as the shift paraaeters which apply to these cost functions, This type of approach is consistent vith Adaaes wsociologicaln theory of institutional. change in which *the tenacity of social and political institutions or their resistance to change varies vith the 3eqrce to which t5ey

~ateria2ly benefit important social. groupsu f1971, p, 563). The strength of this resistance, according to Rdam, is proportional to (i) the nulltber of persons or groups who benefit, (ii) the size and nature of this benefit, an4 fiii) the social power which these groups viefd relative to gssnps who are not beneficiaries of the particslar structural arrangement in question,

Our aodel consists of three different levels of decision saking,------First, the probie~ for capitalists is to maxi~ize l*See chapter 2, section 2.1, profits by choosing tho! opti~alcoahinatfon of inputs (white and bfack skilled labour, and bfack unskilled Labour), given the usual cost constraint as well as the restrictions on labour aobility iapose3 by the state. Second, white and black workers aia to aawiaize their utility subject to their disposable inco~e.Third, and nost iaportant, the rulers who constitute the governaent and other state institutions are assuaed to saxis5ze theit probability of reelection or survival in power, which in turn is a function of the utilities of white capitalists an4 workers weightea by the extent of their political influence, subject to the constraint i~posedbp the various transactians costs inttolved in aaintaining the institutional structure (which are the~selves a function of black utility) relative to the revenue generating capacity of the state.85 The policj instruaents av.%ilable to the rulers include the tax rates leoien on bath blacks and whites, and the mleoefm or "deqree" of apartheid as aeasured by the nuteb~r (or rate of increase) of blacks permitted to hold skilled industrial jabs and the transactions cast premiuw levied an eaplo~ers of unskilled labour. It is assused by definition of apartheid that tha seallas the nuabee of black skillen workers who are employed in the "whitew econoey, and the larger the transactions csst ------g3Rere we are following the example of Prey an3 [email protected] (1979). Their w4sl endogenizes the governwent*~choice of the values of certain policy instrumnts by assuaing that the governing party ~aximizesits probability of reelection subject to a constraint iaposed bp the requirement that public expenditure Bay not exceed tax revenue. nwedge* in tbe unskilled labour ntarket, the greater the extent to which apartheid institutions are anfo~cedbp the state, We pointed out in chapter 3 (section 3,Q) that the application of apartheid policy has EolZoved an extremely flexibf e pattern,

This flexibility is important, since it has Ion9 comprised an object of contention aaong whites, and it is therefore appropriate to treat the degree of flexibility as itself a policy variable, the deter~inationof which is a priae function oE the political process (farolaberqer, 1979, p, 78)- The parpose of our model is therefore to demonstrate haw the optiaal level of apartheid 3egends upon such para~ctersas the costs of the systae, the structure of the white electorate, and athsr exogenous vatiabXes.

The state is assuraed to set a binding ceiling restriction on the level of employment of black skilled workers in the industrial sector, denoted bp tbo, an4 to raise the average cost to eapfoyers of hiring unskilled labour by a factor of Ta, l* These two policy paraaetets together characterize the existence of an apartheid institutional system. The industrial sector produces a single non-trade? qood, %, and a single traded good,

6, whose production functions are of the fortti: ------%*Some clarification regarding the natation to he used in the @ode1 is necessary at this point, A no~berplaced after a variable refers to a partial derivative fe.g, XI is the first derivative of X with respect to the first arguaent in the pro3uction function, and X11 is the second derivative of X with respect to the same variable), fiaxiwna values are represented b~ a bar (-1, a prime (*), or a star [at) superscript. where Lux, Zbx and Lwx are the nuabers of unskilled, klack skille3 and white skille3 workers e%ploqed in the X-producing sector, and Lug, Lbq an3 Zwq ate define4 3naloqously far the

G-producing sector, The unskilled wage rate, au, is exogenouslp deterained by the average pro3uct of labour in the reserves, snR the price of gold, Pg, is also exogenous,

Producers (*capitalistsn) miixiterize the following proPi t function:

- ft + Pa),%u,Lu - os, (Lb + Lwj where Lu = Lnx + Lag Lb Zbx + Lbq Lu = LVX * lug

------'PC is the tax rate appXie.3 to capitalists* revenuest", Ws is the %=Thedistinction between "capitalists* an3 nwotkersn has no real content in a pure genera1 eguiLibtium setting, since all factors earn a normal rate of retarn, Rouevec, ue can distinguish capitalists frm workers by assuming that the forsier possess soae specialized skills in orqanizing and monitoring production, skilled gage rate, Px is the price of the non-traded good, Pg is the gold price and Ta is the transsctisns cost incurred by employers of unskilled labour, The first-order conditions define a aaxiwus prof it function, the optiwal quantities of X and G produced, an? the amunts of skilled and unskilled labour deaanded in the two industries (Lud, Zba and Lvd) as functions of prices, wage rates, Fc and Ta. The partial derivatives of these saximua value functions can then be calculated by applying a lemna of the envelope theorem (Varian, 1978, p, 2651, The details of the calculations are presented in ap~endix3,

Workers choose to consuRe X and supply labour in sach a way as to aaximize their individual utility functions subject to disposable income constraints, For white stilled workers, the prob3.e~ Bay be expressed as follows:

where XM is the quantity a% X consused by white workers, tw is the quantity of white skilled Zabou~supplied an4 Bw is the tax on white earnings, Black workers face a Bore Xisited cange of choice, since their eaploywent levels are assnaed to be constrained by aparthei3 restrictions, Thus black skilled workers behave 3s follows: uhere Xb is the quantity of R consumed bg black skilled workers and Tb is the tax rate levied on black earnings, Similarly, in the case of Slack unskilled workers:

subject to Bx,Xu = f 1 - Tb),Wu,lud(Px, Rg, Uu, Os, Ta, Tc)

where Xu is the quantity of X cansnncd by black unskilled workers, The supply of anskilled laboor is perfectly elastic at the exogenous unski3.led wage rate, Vu, sa that the number of unskilled workers eaployed at any given wage rate is detersine3 by the labour aetaand scheaule, Lud (,) , Again, the f irst-ot3er conditions Refine maximnsi value functions far Xu, Xb, Xu an3 Lw, whose partial. derivatives map be eralus ted using the envelope theorea,

Equilibriua in the goods aarket 9s defined by: - - (71 X (Px, Pg, Mu, Bs, Ta, Tc) = Xw(Px, Ps, Tu)

+ ?b(~x, Is, Lbo, Tb) + %I (PK, Pg, itu, WS, Ta, Tc, Th)

where the *barn - in3icafes a t~axilttw value function, Equilibrium in the ski2le3 labour sarket is likewise define3 by:

Invoking these market clearing conditions, re can obtain reduce4 form expressions for X; 5 Px and Ws which can then be substituted into the eaxiaus value prof it, output, white labour supply and white and black utility functions,

Turning ROW to the poEitical sector of the modef, the ruling group is assumd to maxi~izea utflity function of the forlat:

where z is the ptokability of reelection or survival in office, and is defined as a population share weighted sum of the utilities of the component gsanps of the {white) electorate, 3t will be assuaed that producersP utility is a sonotonically increasing function of profits, so that we my substitute the prof it function, Q (.) . for a white capitalist utility fanetion, He can then siaplify further bg treathag Ur as itself a weightefl

SU~of white uotksrs* utility and prodncerss profits,le The choice problem facing the ruling qroup sap be represented as follous:

where a is the proportion of the white popnlation which conaSsts of shilled workers, C is the f*aparthei3 cost functionw, and O is a shift paraaster which depends on such factors as external support or opposition, ~iZitary technolagp, organfzational ------%*In long-run equilibriua all profits are rednced to zero, Pc may, however, postulate the existence of som fixed factor owned by white eztplopera, The rents accruinq to this factor wilX be diainished if capitaXists are constrained in their ability to hire other factors in the desired proportions, cohesion of internal resistance groups and internal opposition, etc,a7 In effect, the rulers choose optiaal levels of the apartheid policy para~eters, tbo an3 Ta, as well as the tax rates, Tc, Tw and Tb, stabject to the constraint that the total tax revenue sf the state equals the cost of adwinisterln+y, maintaining and defending the apartheid system,i which itself is inversely related to black utility, The first-order conditions for a eaxi~uadefine the Eolloving redace3 form expressions for the fi~epolicy instru~ents:

i7Pressure upon the South Aftican governsten% which originates outside the country way be conceptualfp divided into three categories: (i) events in Africa (e,g, transition to black rule in neighbouring countries such as Xngola, !faza~biqneand Zimbabwe, and the changing attitudes of the so-called *front-line statesd an8 the B,A,t?,) ; (ti) international political deoelopaents, of which the sost Iaportant include the policies of aajor Western indnstrialize3 countries, mZf Southern Africa is to be defended for the Yest - and powerful econosic interest as well as strategic cansiilerations seem to suggest this intention without doubt - the country has to he sade defensible by reaoving the aost objectionable aspects of the present systean [Thomas, 1977, p, I); fiifj factors related to the world econoay, such as the availability of foreign capital and access to aarkets for soath Africa" inilustrial exports, Sources of internal political ptessnre Lncfuds the activities of blacks, both within the urban areas an3 the qovernments of *independent* homelands, the reactions af white opposition groups and the general econu~icsituation, especially rising defence expendituras, increase3 taxes and unenployaent (Thoaas, 3977, pp, 3-to), (11) Lbo* = Lbot fa, Pg, Yu, D)

(12) 'Pa* = Ts* (a, Pg, Mu, D)

(13) Tc* = fc9(a, Pg, Wu, a)

[lrt) Tw* = Tw* (a, 0'38 Wu,

(15) Tbr = Tb* (a, Pg, Wu, D)

Because of the general equi2ibriuw structure of the eodel, it is not possible to derive anambiguous or detersinate conrgarati.rre static sesnlts uithout iaposing a nueber of restrictions on the signs and relative nagnitudes of various elasticities and partial effects,ls The important point for out present purpose is to show that it is possikle to choose a particular set of ~utuallyconsistent assumptions in order to yield cowparative ------static predictions which are intnitivelg pksusib2.e in the 2iqht aaThe need for these restrictions arises out of the fact that no explicit assumptions were sa3e at the outset, regarding the relative factor intensities of the go24 and consn~ptiongoods in3ustries, fn a general eqnilitriua ma3eZ wlth two goods an3 three factors (in which none of tire factors is eiaplogea uniqaelg in a particular sector), the effects of changes in goods prices or factar endowaents upon output and factor returns depend crucially upon the ranting of factor intensities in the two sectors of production as well as upon the aegree of substitutability or co~pXesentaritybetween factors, Thus Jones and Eastan (1983) show that, in such a general eodel where no factor is sector-specific, co~parativestatic results depen3 upon which factor is chosen as the *aiiidle factorn in terms of intensity in the two sectors and upon whether the "extreee factorsw are assumed to be better substilntes for each other than for the %%dalefactor (1993, pp, 53, 98). Onlike wevenw ~ofielsof general equilfbriua with equal nnsbers of factors an3 cosaodities, factor prices in the general 2x3 ~ode2are deter~inednot only by coasodity prices but also bp factor intensities an3 substitutability, sf the underfy ing econosic theory, The specif 3.c restrictions which Me have iwposed are spelled out in appendix 3, where full calculations of the results are also provided,la Even after establishing these restrictions, it reeains Aiff icult to evaluate the effects of changes in the gold price and the unskilled wage rate on the optiaal tax rates levied on eiaplopers and on white workers, because QP the interdependencies which are inevitable in a general equilibrium artadel. Revertheless we are able to assert, with appropriate assuwptions, the following coaparative static iwplicatians of the wodel:

A aiscussion of these results follows in the next section.

------•÷*The restrictions are essentially of three types: [i) technical conditions regarding the relative slopes of goods and factor i3aatand and sapply functions; fii) those specify inq the relative aagaitudes of effects on prices and waqes of changes in exogenous and policy variables; (iii) those specifying the relative sagnitudes of the aarginal utility or dfsntility attached by various groups to changes in nollcp variables, 1422 LseUcntinas SE! P~e4LcSon~2% tk 2SeL Perhaps the titost striking conclusion to be drawn fro@ the

above analysis is the cmtple~ityof the relationships hetneen the various groups of beneficiaries an8 suborainater, The

general squillbriue nature of the aodel ensures that it is not

always possible ta produce a cleat ?elineation between qtaub

interests, Zn this respect, the mode2 3eparts sost noticeably

from those of Porter (1978) and LundahZ (1952), The fatter

purport to illustrate the determinate affects of apartheid

restrictions upon an ad hoc and co~plexset of objectives which

are attributed to the white ruling group, The present model, b~ contrast, starts out with the siaplest gassible postulate of

individual utility saxisization and procee3s to show that the effects of apartheid policies on the enilogenons varfabfes are by

no means unaabiguous, Hevartbeless, by appending a @ode1 of

political decision aaking and by specf f ying appropriate

assuwptions, it is possible to inaicate how the aptiaal "leveln or extent of enforcerent of apartheid institutions is chosen,

and hor changes in certain variables are likely to affect this choice, The aodel is therefore able to provide a *rationalen far apartheid which lies within the boundaries of economic ~ethofi.

%ore specifically, the analysis in the previous section

shows that an increase in the costs of defending, adainisterinq

and otherwise maintaining the apartheid sgstee #ill result, csteris paribus, in a reduction in the *TevefM of apartheid fie, a reduction in the extent to which apartheid policies are applied and enforced, uhi.ch is represented in the sodel by an increase in the nuaber (or q~ovth rate) of black skilled participants in the Labour aarket an? a decrease in the transactions cost pre~iuxnon the vnskilleB wage cate) (results 4 and 8). flesulls 1, 5, 9 an3 33 imply that an increase in the degree to which white workers bencf it from apartheid, measure? in terms of an increase in the proportion of white workers in the total voting population (a), translates into an increase in the ffdeaandw for apartheid, This in turn will result in a larger amount of apartheid being *purchasedff, in the sense that there will be a reduction in tbe rate of absorption of blacks into the ~odernsector econoap and taxes on e+apIopers and blacks will Be raised in order to finance the hiqher level of enforcesent of apartheid institutions, which now have a higher aarginal utility to white decision aakers, Results 2 an3 6 wean that an increas% ia the uorld gold price will cause a reduction in the opti~al level of apartheid, which in torn derives partially fro^ the positive output effects of such an increase an2 the consequent decline in the perceive3 need by white workers to artificially restrict black cowpetition, For sitnilar reasons, a rise in the exogenous unskilled wage rate will reduce the benefit &?rive3 broa the maintenance of a given levell, of apartheid {resttlts 3 and 7). A higher unsltiller? wage irnplies that it is no longer necessary to artificially restrict the inflow of black unsfille3 workers to the sane extent because unskilled laboor is rendered less conpetitiva by virtue of the increased wage, The wdeman3fl for apartheid

institutions is accordingly reauced, The positive oatput effects

of a rise in the gold price also enable blacks to be taxed at a

higher rate without raising the level of resistance by an anrount that would impose unacceptably high casts on the ataintenance of

the systea (result I@). Results 10 and 76 imply that an upward shift in the costs of policing an? ajaiaisteting apartheid institutions {due to a chanqe in the parameters of the

*apartheid cost functionm) will rednce the optiwal tax rate

levied on blacks and on white employers, because such taxes

enter negatively into black utility functions and therefore lead

to resistance by klacks to apartheid policies, Result 15 Beans

that an exogenous increase in black unskilled gages makes it

less costly to tax black workers, so that the optinral black tax

1 rate increases, riaally, result 11 sho~s that a rise in the

proportion of vhite workers in the total white population causes

a fall in the opti~altax rate on white wage incosa, while

result 12 shows that this tax rate will increase if the apartheid cost function shifts upwards,

nost of these reouf ts are pstentiaZZy testable, for exainple, the aoRel leads us to expect a negative relationship

between exogenous cost changes and the nlevelH of apartheid, The

latter mag be weasured either directly by the sizes (or rates of

growth) of the urban black skilled and anskillet3 labour forces, or indirectly by the expenditure of govern~cnt depart~ents

entrusted with the task of adarinisterinq apartheid policy [e,q, Bantu Adntiaistraticn, black education and housing, etc,). A

shift in the "apartheid cost functionw may be proxied by changes in expenditures on natronal defence, foreign affairs and propaganda efforts, as we21 as other expenditure categories which are responses to perceived threats to the systeg. Tn

addition, we will test the predictions of the model regatdinq

the effect of demoqraphic changes fc,q, in the proportion of

white workers in the electorate) and alterations in the level of white net iaaigration on the optiatal extent of aparthei.3 policy,

We way broaden the definition of ncapitalistm to include those

white rorkers possessing Xacge rendovaants of hulean capital (e,q,

peofessioltal an3 technical vorikarsj, an? the mode2 will then

isply that a shift in the occupational strncture of the white

population towards these job categories will cause a decline In

the application and enforcentent of apartheid institutions, Xn

the saae light, we say exmine the future raaifications of the

new1 y adopted constitution, under vhich Zisited nuabers of

blacks (name1y, *Colouredse and Indians) will. be included in the electorate, Xn terss OP our rodel, this would alter the

structure of the ruling groupts utility function by increasing

the proportion of the voting population who are material1J disadvantage4 by the systea, and we may thus expect a decline in the opti~alextent of apartheid,

The theory outlined in this chapter therefore facilitates

not only an explanation of the flexibility and ailaptability of apartheid institutions which is consistent with individ~a2 rationality, but it also enablers us to identify some of the variables which are relevant in determining the abilsty of these institutions to survive 3s a siable political system, Tn the foflorinq chapter we will detnonstrate how a number of the nodel's iaplieations say be subjected to eapirical testing, AL.212 laSrlri&sil.sil In this chapter an atteapt will bs made to subait some of the theoretical relationships identified in chapter O to eapirfcal testing. It should be stressed at the outset that the puantitative analysis undertaken here is entitelp exploratory, an3 its purpose is priaarily to suggest ways in which the theory may be confronted with the teal wotZ4 rather than to present any definitive resalts, The Iisited scope of the eapirdcal estiwation described id this chapter is not, hauevet, a eattar of deliberate choice on the part of the author, but is largely dictated by the inadequacy of the available data and by the difficulties inherent in ao?el specgficatian, The latter, in turn, derive froa the problems fnoofvea in aeasuring an elusive and aultidimensional pheno~enonsuch as apartheid,

Xn the next section, cettaln pertinent methodalogicaP aspects of econonetric ptactice will be Riscussed. We then proceed to outline the wethod adopted in this study, an3 to present soae of the results. The conclud isg section indicates avenues for f urther research a1ong si~ilarlines, f L2l 3s !!arhs&l~&$s2 &%zsss& It has lonq been recognized hp econ~aic historians concerned with the application of quantitative techniques, that ais-specif icatioa of aodels and proble~s of underfdantif iea equations represent the nost severe obstacles to seaninqfnl e~pishcal testing of their theories (Poqel, 1967, p, 295;

Idright, 7971, pp. U22-423). The salfte way be said far econoaic aodels of political an3 social behav2our in general, in which clearly identified structural relationships are not as. well established as in more ttaditianal branches of econoaic theory,

Thus Desai points out that, in such aoqels, there is a stro~q likelihood that variables will be missing from equations and that the resultant underidentification will preclude the scono~istfro@ nakiag any causal inferences, Instead, he will be able to offer little aore than statewents ahout Wtenaencies towards correhtion* aaong the variables he is studyinq (Desai,

The econometric caveats involve3 in speciEication search and diagnostic testing are well known an3 ue need only allude to thein here, Uendry has shoun that deception 9s easily practrsea by econo~etricians who have found their wPhilosophers' Stonew in regression analysis and use it for transfarafng data into supposedly nsiqnificantw results (1950, p, 389). Tn f#enRzp*s nor ds :

Siaply writing down an *econoafic theorym. leanipulating it to a Rconacnsed for%" ,,, and *calibratingw the resulting parameters using a pseudo-sophisticated estimator based. on paor data which the aadel does not adequately describe cnnstitutes s recipe for disaster, not for siauXating go13 ET980, p, 901)

In order to avoid such alchemical perversions of econowetric techniques and to ensure the status of econometrics as science, liendry and his colLaborators suggest that the researcher concentrate on daaonsttatinq precisely wia different madals produce 3if ferent results, Pn stressing the iaplications for each model of the results obtained by others, a sajor tole is assigned to ais-specification ana'fysfs. Even with the use of a data-based *'generalw atodel, it is non-trivial to explain vhy different researchers arrive at different conclusions:

That the general model is not obtained by every investigator seeas to depend on the operation of (self-imposed) constraints li~itinq the range of specifications, estiaatots, diagnostic tests, etc,, which are esployed, Snch arbitrary and unnecessary constraints can play a large rule in detersining the final equations selected .., (Davidson, et. al., f978, pp. 662-6631.

Estiaated regression coefficients ate often Bore the prodnct of the a ptiori beliefs of the investigator than of actual sa~ple inforraation, Phis is reflected not only in the equation specifications selected bp the individual researcher. but, aore insiduousf y, in the fusuall~) unreported pretesting or r*data ainingn practices which precede the pnblication of resalts,

Failure to take account oE pretest bias isplies that interaediate findings and alternative specifications are not reporte0, so that nnegative ra%ultsw ate under-represented and potentially useful information is concealed (Fefge, 7975, p, 1293; Beijtlra, 1984, p, tsb) . The regressions which are reported ate usually the outcome of a prolonged specification search, and therefore do not represent statistical tests unaabiguouslg iaplied by the theory (Coofey and EeBog, 1951, p, 826), In fact, specification search renders invalid the application of standar? tests, In order to lrrtitigate this problem, Cooley and LeRoy

(follouing Lea~er) suggest that uacertaint y about equation specification should be ad3tessed nireclly by dividing potential regressors into two classes - naaely, "focus variables" and . *doubtfa1 oariablesm (1981, p, 827). The researcher would then proceed to ascertain the sensitivity of the estiaated. fscns coefficients to the inclnsian or non-inclusion of various mdoubtfulm regressors, This approach would be partfcuPasZy infosaative in cases ohare probleas of siwultaneit y and identification of a strxxctucal aodel prevail, and where the subjectivs ju4gement of the researcher is necessary to detere2ne the tgpas of restrictions which should appropriately be placed upon the specification.

Unfortunately the empirical work unnertaken in this chapter does not have the advantage af proceding on the basis af a correctly identified stractaral model, Xnstead it bears much in coaaon with a large body of clioaetric literatare which, according to Wright, is characterized by the "casualm use of regression analysis C1971, g, 9221, The ters casual is not intended by Yright to carry pejorative connotations, Rather, it refers to the application of regression analysis siaply to verify certain correlations which my he present in a set of data, but without the utilization of a larqe well-specffie? spstesl of equations (Yright, 1971, p, 823; Fogel, 1967, p, 298).

Haper points out that the results of Bast applied econoaatric uork should not be reqarded as evidence fros a mcrncial experiweatn, but should instead be treated ss sere *circuastantial evidencem in favour of or against the hypothesis

In question (1980, p, 1731, This rriew is consistent with

Friedman's belief that repeated snccssfnl application of a theory becoaes indirect testimony in its favour (fieijdra, 19Ru,

Po 47n). The @ode1 developed in the precedinq chapter suggests that certain types of independent variables Rap be important

3eterainants of the extent ar level of application of apartbsi4 institutions, The regression results presented in this chapter cannot identify relationships of cansaf ity amng these variables, but can serve only to confirw the existence of what

Desai refers to ss "tendencies towaras cotrefationn, Proble%s of sulticollinearity, the llwitsd range af data observations, and ths lack of a priori knowledge about appropriate lag structures,

Sean that aost of the estisated epuatidns ate likely to be ais-s~ecified, and the reliability of tbe coefficient estimates and t-statistics should he discounte3 accordinqlp (Xenndg,

$979, pp, 57-58, 128). Kt is worth repeating at this point that the purpose of the exercize is not to arriro at definitive resnlts which purport to n~onfiranthe predictions ob the moael.

We are also not able to confront the theory with an alternative explanation in order to test their relative predictive power, since there does not exist: an establish& orthodoxy capable of yielding empir icaf ly testable hypotheses against which a new theory say be compared, Instead, oar ase of regression analysis is ncasual"f, in Wrightfs sense of the word, an3 we claia to offer little more than soBe initial an3 sosewhat tentative

# "fcircuastantisl evidencen, The sost iapartant contribntion of this chapter is not to provide actual quantitative findings* but to illustrate how apartheid institutions and their detersinants aap be weeasureilH in an operational Banner,

According to the sodel proposed in chapter 8, apartheid say be represented by a qnantity constraint upon the supply of skilled or educated black workers, and by a pteaiaa placed an the price of unskilled labour, 80th of these aanffastatians of the aparthei3 spste~are assused to reduce the extent of blsck

{skilled an3 unskillellj labour force participation in the industrial econonp below that which would prevail in an unconstrained situation, In addition to the instruments of apartbeid itself, the ruling qrcnp also deterwines the tax rates applied to black and white uolrkexs and (white) t?~plo.gers or wcapitafistsn, All of these endogenoas variables are functions of four primary exogenous oariakles - naaely, the proportion of the white electorate which consists of skilled workers as opposed to capitalists, the gold price, the unskilled wage rate, and the costs of defen3ing and a4~inisteringthe apartheid system (see chapter Y, equations 13-75). Ep placing approphiate restrictions upon the general epuilibtiuw structure of the ao3el, we obtaln qualitative predictions regarding the signs of the partial 3erivatives of these reaucen for% !!unctions.

The extent to which we are able to give quantitative substance to these predictions is, of coarse, conditioned by the data which are available, It was not possible, unfortunately, to obtain separate tiae series data for tax rates levied on black and white rorkers, and only corporate taxes and taxes on the ~iningsector are used in estisation, explicit data for governsent expenditure on administering apartheid lavs and regulations were also not available, so that oiarious proxies are used to represent the level of resources absorbed 3.n sustaininq the apartheid structure, lany of the more interesting and useful tine series do not extend over a sufffciently long period, with the result that most of the regression equations are estisate3 over relatively short ranqes and are characterized bp limited degrees of freedom, In adjition, the data are highly collinear, which produces imprecise and unstable coefficient estimtes, high valnas of the coefficient of deterwination and low t-ratios

(Xntr iligator, 3 978, p, 353) , These prablerss render diff icnZt the process of specif3.cation search, since the removal or addition of a single explanatory variable or data paint canses draaatic chaaqas in coafficient estiwatcs and tests of significance, Tncorrect spechfication my therefore be inevitabfe, and in those cases where relevant variables are oaitted, the estiaates will be bLasea and inconsistent, Zf a

facgec number of regressors is used, however, the probless of

multicollinearity and inadequate deqrees of frecdos are further exacerbated (Intriligator, 1979, pa tr38), ft Ps assuaea a prior1

that the behaviour of politicians an9 bureaucrats does not adjust iastantaneouslp to changes in constraints, and sost of

the independent variables are accordiaalg Lagued by one or two gears, Lagged 8ependent variables are sa~etieesincluded on the

saae grounds, However, the theory provides us with no

inforaation as to the precise lag structure which is

appropriate, so that the specification of fags within the

regression equations is unavoidably a4 hoe, According to Eayer,

this is one of the few instances in vbich sose If~fted data aining or pretesting is a necessary evil (3980, p, 174). r3uf

equations are estiaated using two different types of function2kl fora - loglinear an3 first differences of logarithms, Representative exasples of both are illustrated in tables 5,1 to

5.4, All nata are annual an3 are defined in appendix 3, where their sources are also docuwented,

In table 5.1, the e~tentof apartheid is ~easaredby the accessibility of higher education to nonwhites ant3 the potential supply of educated nonwhite workets, This is intsnde3 to captnra the quantity-constraint aspects of apartheid restrictions on the skilled nonwhite labour force, The actual educational measures used are: the number of blacks enrolled in secondary schools per one thousand of the population (BSECSCRS), the nn~berof black sod nonwhite students enroXfed in universities per one thousan?

of their respective populations (BWRZVS an4 BuSll%IY5), and the

ratio of the nuaber aE coloureds an4 Indians enrolled in teachers* training colleges to the total coloured and Indian

population (CTTEACHS) ,a Begressars include the real gold price

(RPGH) and various neasures of heal unskilled wages fAYB%%W,

RVASZRB) ,z Changes in the exogenous shift parasreters of the

apartheid cost function are captured by a nnaber of variables

which represent the extent of policing and defence activity. These include real govarnatent expenditure on national defence

{RDEF), indicators of doaestic black and nonwhite strike action

or work stoppages as proxies; for Internal resistance (RYIRKSTP,

rfSTBlKE), and dutrray variables representing the 3'973 Darban

strikes (DST) and the col'lapsa of the Portuguese erpire in 1974 (DPT),

------I------%In chapter 4 the analysis was simplified b$ diwiaing the South African population into black and white cosponents, where the category =blackw was intendea to inclu?e colaureds anti Indians as well as Africans, Tn this chapter we will follow comon usage by reserving the tam %lacke for persons of pti~arilyafrican descent, The anonwhiten group embraces blacks, coloureds and Indians,

ZAVBRYW is the average annual real wage rate of nonwhites employed in mining, manufacturing, construction, transportation and governnent, and as such it will incZa4e soae skilled wages in addition to unskilled, Tts use as a psarp for tbe unskille? wage rate is motioated by the fact that a large sajoritp of blacks eaployed in these ssctota is likely ta be nnskilled, RWASERV is an index of the average annual real cash wages a6 full-time dosestic servants, and its use as a acasure of the unskillled wage rate is less probleraatic, since tio~ssticservice is one of the least skil2e3 eaployteent categories,

JZt is assnated that the Durban strikes of f9?3, and their political afteraath, significantly raised the costs of adininisteriny and policinq the systsa of in4ustrial relations, The wadel !ietpeToped in chapter 4 pre3icts that a rise in

the proportion of the vhdte electorate which coaprises

nca pitalists" or ellcrplolyers will result in a dirtlinntion af

apartheid institutions, ais pointed out in chapter 4 (section

U,3), we say define profassional and technical workers, and others endove3 with large amounts of huasn capital, as members

of the capitalist group, Dnfortunatelp, time series data for the occupational structure of the workforce are not available an3

proxy variables must be nsed, These inclnde the number of full-ti~e white univer~itj students per one thousan4 of the

white population (@B%XVS) and the net iamigration flow

(ITf4IG-Efl7GfS This choice is justified on the qrounds that university attendance is h&hlr correlated with the acquisition

of human capital, and on the assnwption that the aajoritp of ismigrants and eafgrants are whites with professional or

technical qualifications, ?he une~plogeentrate aaong whites, coloureds and Indians (UIE?PS) is iactu8ed as a rough baeasure of the efficiency cost of apartheid, Changes in the une~ploy~ent rate aay translate into shifts in the apartheid cost function which is relevant to the raling groupts decision waking process if sow of the uneaployaent is perceived by their poZitical opponents as a direct autcoae of the nisallocation of resources ------3(conted) Xn fact, the increase? level of black worker consciousness undoubtedlp contributed to tke liberalization of industrial relations legislation which occurred in 7979 {see appendix 23, The advent of black lrrajority rule in noza~biquean4 Angola is assuaad to have increased the costs of defence against external attack, consequent. upan apartheid restrictions, Finally, various eeasores of the level of economic activity or rate of econaaic

growth are incorporated in the equations, such as real noavage

income {PHDNYAGg) , real gross dogestic product and national

product (RGDP, RGNP) aria per capita income {PCRGDP), A linear tine trend fZ) is included in equation 1, and a one- or two-pear

lag is applied to mst of the ex plan at or^ tratiab2es.

Exa~ination of table 5.1 reveals sign ificant positive

correlations between the numbers of blacks or nonwhites attaining higher levels of adacation and such regressors as the unskilled gage rate, nonwhite strike activity and white university enrolaent and net iin@igration,* Tf these variakles are interpreted in the aanner described above, the signs of

their coefficient estimates ate consistent with the predictions of the theory - naaelp that lower levels of application of apartheid policy (represented here by increases in the nuebeirrs of nonwhites permitted to acquire higher education) will resnlt

froa a higher unskiZled saga rate, an increase in the proportion

of the white cXactorate who are nan-workers ut an increase in the costs of 3efending apar theid, The predicted relationship

between the gold price and the depen3ent variables is nut confirmil, except in equation & where the gold price has a positive coefficient, It should be stressed once again, of

----I------*The degree of significance is measured in a one-tailed test at both the 95 anii 90 percent confiaence le-eefs (see tables 5,l to 5,0 for the relevant critical valaes of the t-statistics in each case) course, that the coefficient estimates an8 t-statistics are not reliable due to aulticolPinearity and specification error, One of the endogenous variables in the sodel propose3 in chapter 4 is the tax rate "Levied on capitalists or employers

(Tc), which should bear a neqative relation to the proportioa of the white electorate consisting of non-workers and a neqatfve relakian to the costs of enforcinq and defendinq aparthei? institutions, adequate time series data far tax rates thefftselves are not availab'Le, but data were obtained for tax reveaues collected from mining, ~anufactucingand coansrcial enterprises,

In table 5.2, the variable TVTAXFXR is an soerage index of total taxes paid by such firas, an3 RPIXR?5Z is total revenue from taxes on wining companies, Regressors include sarious seasures of the costs of apartheid, such as the share of gross national product allocated to defence spending (DEFS) . the unel?rplo.grrtent rate, an6 the nunber of banning orders served on individuals

{BAN) ,s Other in3ependent variables are the nnskilled wage rate

[RWASERV). the real gold price (RPG?!) and per capita national incone (PCRIfiI). Table 5,2 indicates a strong positive relationship between the voluae of corporate tax revenues an3 the gold price, and a strong negative relationship between these

------I----- STbe banning order is an instruaeat used by the South African governmot to restrict a person to a prescribed place of residence and prevent hi@ froa eagaging in work which involves contact with Bore than a sma3.l number of people, The writings an3 utterances of such an individual cannot Be pnblished or quoted, Banning orders are applied an3 enforced through the judicial spstea and the auatber of snch orders is used here as a proxy for one catsgorp of the costs of maintainfag and policing the apartheid system in the •’ace of internal resistance,

* All wariables arc defined and described in appendix 4, The method of estisstion is orainary least squares and the nu~bets in parentheses are t-statistics, The corrected coefficient of deter~inationis provided at the end of each equation, The Durbin-Watson statistic is not reporte? since it is not possible to sake any neaningful inferences from this statistic uhen there are fenet than ten degrees of freedolrt, T(O.OS) is the critical value of the t-statistic at tbe 95 percent confiaence level in a one-tailed test, and T (0, ?O) is the corresponding critical value at the 90 percent confidence level, taxes and the unskilled wage rate, Conclusions with regar4 to the costs of apartheid are aabiguous. Unfortunately, as nentfoned above, the lack of suitable data prevents as Prom examining the effect of apartheid parameters Ppon personal tsxes on white and nonwhite workers,

The aode3. in chapter 4 iaplies that apartheia restrictions will have a negative effect upon the size of the nonwhite labour force employed in the industrial sector, In table 5-3, Zla is the total nusber of nonvhites employed in ~ining,sanufactntinq, construction, transportation and central qovcrneent, PR9lg% is the nonwhite participation rate, defined as the ratio of noavhite employaent to total nonwhite populatian.6 Tn equations

9 an4 10 of table 5.3, the 3ependent variables are the ratio of nonwhite industrial employaent to white eaplof~entin the saae sectors, and the ratio of the nonwhite participation rate to the white participation rate fdef inea analogansly). The regressors are the saae as those incla4ed in tables 5, t and 5.2, with the

*This definition of the partici~ationrate is necessitated kp the fact that data on black uneaplopsent are not published, * See notes to table 5,1,

addition of RGZXHUtl {total real expenditure by South African gorernrrtent institutions in the klack homlands) , WK5TOPS {ratlo of the nurnber of nonwhites involved in work stoppaqes to total nonwhite industria% ersp'ioyrtlent) and DEFSEP freztl per capita defence expenditure). The forrrter tva represent measures of the domestic administration and policing casts of apartheid, while the fatter is an indicator of external defence costs. Since the oaptoymnt of nonwhite lahour is likely to aepend upon the prices of substitute factors and the price of output, the rgal white industrial wage rate (&VRbiN) is incorporaten together with the long-terra interest rats (3RT) in egoation 9 an8 the cansulner price index (CPI) in equation 7, i? dumsty for the Soweto riots af

1976 {DSO) is included in equations 8 and 70, on the grounds that a sudden exaqenous increase in the level af internal.black resistance translates into an upward shift in the apartheid cost function. In equations 7 and 9, there is a notable positive corre'lation between the ~agnitudeof nonwhite elaployaent (or the participation rate) and the nusber of whites who iaentify their interests with the capitalist or employer groap {representea hy

EIflJIVS or IrYfrJ-EElfGf. 'The gola price is positively related to nonwhite e~plopaentin equation 7, ss is the unskilled wage tate

(BUASERV) in squation 9, The asst striking result to be derived from table 3 however, is the consistently significant positive correlation between the various seasures of the costs of policing an3 dsfansling apartheid (RDGF, d?FSP, 3STBIKE ~m?

WSSTOPS) and the relative size of the nonwhite labour force, The dummy variable for the Sonreto riots {DSO) atso bears a positive relationship 0 the absorption of nonwhite workers in the industrial sectors of the econoBp,

The level of enforcement of apartheid policy is seasurea

Bore directly in table 5.Q. Tha va~iabteBADETS (the ratio of

- rj*OS*DSP (-2.87) t-l - 2 R = 0-99 range = 1966-11375 T(0.05) = 2,926 T fO,tO) = 1,896

* See notes to table 5, I, nonwhite to white esployees covered by statutory miniwaa vage detsr~inations enacted bp the %?age 3oar4) is assulned to inversely reflect the extent of agarthei4 in the sense that a rise in this ratio is associated with a diuiinution of apartheid,

7 On the other hand, CPBWS (the nu~berof coloared and xndian adults placed in e~ploysent aanually by qooernment latour bureaux pet one thousand oE the colonre3 and Inaian population) is a direct index of the extent of apartheid, Labour bureaux are one of the chief instruments of inflnx control (see appendix 21, and the voluae of th~i~activity can therefore ba regarded as a useful indicator of the extent to which apartheid policy Is being enforced, "the saree is true of the variakle PRSI.&V Ithe number of persons prosecuted annually Tor offences relatinq to reference books, inflnx control and other *pass law* violations) and PRSZAWS, which is the saae series we%ghtet3 by the size of the total black population,

The regrassors used in table 5.4 include a number of those which appeare3 in tables 3-1 to 5,3, as well as RVRWOWSK, uhich is the lverage annual nonwhite wage rate paid in the mining sector, and is intended to represent a general measure of the unskifLe3 rage rate, Since apartheid is approximated Bore closelg bp the dependent variables in this table than by those of the previous tables, it is perha~snot surprising that the aost consistently significant results are to be found in table

5.0, There is a strong negative correlation between the real gold price (RPG"1r XPGC) nn3 the leva1 of apartheid in all the ------equations which contain this variable as a regressor, TSee footnote 9 to chapter 3, Fur%haraore, in equations 17, 72 an3 15, there is a significant negative ref ationship between government spending on the klack homelands (a proxy for one coaponent of the costs of maintaining apartheid) an3 the extent of enforce~ientof apartheid laws or ideology, In equation 15 there is also a siqnificant negative correlation betreen real per capita d~fenceexpenditure (DEPSP] and the number of "pass lawn prosecutions. In equation 13 the regressor W'UWZYS Rap be teqarded as a proxy index of: the proportion of the white population who are nun-workers, and it desonstrates a strong inverse relation to the PASLAWS masure of apartheia enforcement, Xn equations 32, 23 and 74, inclusion of the duaey variables DST an4 350 suggests an appreciable decline in the application of apartheid policy consequent upon exogenous upward shifts in the apartheid cost function due to increase3 levels of internal black resistance,

1ZA Es~ckisSnsasni! I~szu~for Egirh~~Zg~igfch Bs pointed out in section 5,2 above, no Refinitive quantitative conclusions can be derived fro* the regression analysis undertaken in the present chapter, This is the resuZt of data problems v hich inevitably praclude correct specification and under~ine the reliability of estimates, Under such conditions, the purpose uE empirical work cannot extend auch beyond an attempt to verify certain "tendencies tuuar3s correlationm which are iaplied by the theory in question, To the extent that this is successful, same ncircu~stantialevidencev*

* See notes to table 5-1, say be provide4 in favoar of that theory. It is with this lieite3 objective in aind that we have eabarked upon the analysis described in the previous section, and the significance of our conclusions should be judged accordingly,

The theory of the apartheid polity 4e~elopeain chapter 4 irplies il negative relationship between the extent to which apartheid policies are enforced, defended an4 naintaina4 on the one band, and the gold price, the unskiXled wage rate, exogenous shift paraneters in the apartheid cost fnnction, and the proportion of the white electorate who ate non-workers, on the other hand, The predictions of the theory with teqard to tax rates could not be tested due to a lack of ftata, except for sose cursory and incanclusive analysis of cowpanp taxes, The wst iapostant results are therefore! those which relate the level of apartheid (whether measured ,lirectfy, or in terms of educational

access or industrial eaployiaen t) to the various explanatory

variables suggested by the theory, Since the theory itself

provides no explicit guideltnes as to the correct specification

of the regression equations, it is hardly surprising that the

results presented in tables 5-1 to 5,4 are not always consistent, The only legltiaate conclusian is that wc have nut

succeeded in either confirminq an refuting oar theory, #e have

provided soate ncircuastaatial evidence* in favour of the idea that the spstea af apartheid is responsive to the costs of its

own maintenance and other objective econo~ic const mints,

although ad~ittedly, this itself is the outcoae of our

preconceived judgeaents reflected in the chosen specifications.

#evertheless, we have shown how it is possible for such circuastantiaf evidence to be accumlateia in the fature, Xt would first be necessary, in the context of an ongoing research progtaa, to obtain improved data, The eapirical exercize undertaken in this study has, if nothing else, at least inx3icated which types of data Ray be useful in testing such a the or^, and how these data aay be interpreted and analyzed in an operational Banner, It would be particularly helpful if the number of data observations contained in several of the tine series used in this chapter could be increased, so that future eapirical work vould not be constrained by inadequate degrees of

Ereeaoa, This would also facilitate the use of additional dumay variables to capture the effects of Lnportant historical events which currently fie outside the range of most of our

reyressions, {For example, it wouln be interesting to exarine

the iuipact on apartheid of the Sharpeville incident of 1960.6)

Data for nonwhite strike activity* work stoppages and other

indexes of internal opposition have been shown to be

particularlp useful, The same is true of such explanatory

variables as na tianal 3efence expenditure aria expenditure on

maintaining the institutional structure of the black ho~elands.

Collection of additional data of this t~pefincludinq a consistent tiae series of relevant components of government spending on Bantu adainistration and other *apartbei3 departrentsw) is a necessary task for any farther research, Glnly once iaprovea data have been obtained will it be desirable to proceed to the application of sore sophisticated econometric

techniques, 4t that point it will also be possible to judge the success of the aodel's predictions relahi~e to those of alternative hppotheses,

-----*------@On Rarch 21, 1960, the police fired on a crowd of ~named blacks denonstrating against the pass laws, The incident signalled not only a rise in domestic opposition to aparthei4 policyl but also an increase in the level of international opprobriu~, The 5harpeville shootings, coinciding with an increase in African meabership of the anited Rations, brought the conduct of 5011th iafrica to the attention of the Secnrity Council which passed a resolution (S/4300) stating that the South African govern~snt's policies had 9*led to international friction and if continued ~ightendanger international peace and securityfi, The support of the United States for the resolution watked a dramatic change in its attituae to Sonth Africa (Rupef, 1971, p, Q70; Spence, 1973, p, 53 3) , fn chapters 1 and 2 it is shown that the ~ethodoloqy of neoclassical econoaics is able to acco~aodatean explanation of various fornrs of behaviuut which arc norma'llg regarded as lpinq beyond the boundaries of econo~ics,We have been particularly concerned in this study with the application of the postulate of utility maxi~ization an3 rational inaividuql choice to the sttuctuze and change of poXitical institutions, To this end, it is necessary to review in soae detail the contributions of bath nodern public choice thebry and the "new- econowfc history, The coeson probhe%atic addressed by these two bodies of literature is that of the transEorination of inaividaaf utility maximizinq behaviour into callecti~achoice of institational or contractual foras, The structure of property rights an3 the costs attaching to transactions in these rights between individuals or groups will inevitably constitute itflpor tant constraints relevant to this process of social or political choice,

In chapter 3 we survey a nuaber of approaches to the explanation of apartheid or race fiiscriaination which are current in the social sciences, Certain econo~ic theories of discrimination and sociological perspectives on racially differentiate? cot~aaunitiessuqgest that a set of institutions, such as those constituted by South African apartheid, map be the outcome of rational choice rather than traditions l belief or atavistic prejudice, In an attempt to foraalize this iaea, we proceed in chapter 4 to develop a wodel of the South Afrtcan polity, based on the siaplest aesu~ptionsof individual utility aaxiaization, B highly abstract general equilibriua representation of the economy is augaenteR by an equally si~ple wdel of collective choice founded on the concept of a preaatory state, Xt is thereby shorn that the extent to which apartheid institutions are enforce4 or applies can be determined endogenously through the operation of a nusber of ecano~ic an3 political constsaints perceived by the ruling group, of which the mast important ate the costs incnrred in ad~inisterlng, defending and poficing the apartheid systen, A theory of the state fraaed in these tetras is capable of yielding eapirica21~ testable (i,e, potentially refutable) illtplications, For exatnple, it is predicte3 that the Iarel of enforcesent of apartheid ui'il depend not only on the casts of aaintaining apartheifl institutions in the face of internal and external politicax resistance, but also an other exogenous factors such as the occupational structure of the white electorate and the gold price,

Xn chapter 5 the problees inherent in submitting such a @ode1 of political behavionr to the litrnus test of real-world data are describes. Econoaetric theory warns against the dangers af attributing too much credibility to statistical tests of signif icance when data problems an3 fiif Ficulties of model

specification are present, Nevertheless we are able to show how

apartheid institutions Bay be en3owed vith quantitative

substance in such a way as to tender operational the theory

proposed in chapter 4, ?n the remaining section of this chapter,

we will attempt to locate the approach suggeste.1 in this stu?~

within the ongoing 3eba te over the survivability and

evolutionary or revolutionary ~otentialof the apartheid syrtes.

It should be eaphasized that the renarks ea4e in this regas3 3re specul.ative, and are included only to place in broader

pesspective the intplications of our ecanamic @ode1 of the apartheid polity,

Xt has becose almost oblfgatory to conclude stndies of contemporary South lfrican society 81th speculstion or win•’or~e4 guessesw by the author about the survivability of apartheid, %a atteapt ufll be eade here to predict the future in a deterainistic fashion, Xn the words of Ricks:

,,, we shall not be able ,,, to extrapolate into the Euture; all we shall be able to do, all the economist is ever able to do, is to speculate about things which, more or less probably, map happen 11977, p. 8).

The best that we can hope to achieve is to show what iwpfications the analysis in chapters 4 and 5 holds for the ongoing debate on the possikilities of future change! in the apartheid systea, To this end it u%PI be useful to provide a brief review of the different perspectives an such change which

138 are currently popular in the social sciences literature,

One approach, which (as noted in chapter 3) is particularly prevalent aaong liberal economists, is the view that econo~ic growth and development will gradually erode away the aparthei? edifice, Thus Bramberger jt97q) proposes that white prosperity and white security or supreaacy are substitate inputs into a

"social production functionn, for exantple, if the practice of allowing blacks to perfora increasinqrp sophisticated technical and organizational work by constantly redefining apartheia restrictions ware abandoned in oraer to promote "white security*, then *the authatities woul? be substituting suprewscp for prosperity on the uargin an4 the ogportunitp cost of supreaacy in terns of prosperity uouLd increase over time as actual output and consuapt ion fell further below potential

1evelsW (Bro~berger, 1974, p, ?f), Ht is Bsaaberger*~belief that whites will, in fact, traae *securityn for increased prosperity and will accolliaodate the neeas of a stable atban black labour force by making it ideologically acceptable to administer the colour bar with increasinq flaxibility, Tn this way, economic growth will lead to an anlatgement of the feasible set of desirable social arrangerents {Tbid,, p, 53).

Hot a21 theorists subscribe to the view that there is an inherent Incorpatibility between avarthei? and econo~icgrbwtb

(see chapter 3, section 3,Q). Ievertheless, in an era mrkinq the end of political colonial is^, mst critical analysts of

Sooth Africa have forecast the inevitable failure of apartheid (Ada~, 1991, p, 0). The increasing polarization between opposing

blocs of Afrikaner an3 African nationalism was believe3 to

presage revolutionary change, *Hence, alaost all social science studies on South Africa publishe3 during the sixties have

predicted violence, bloodbath, unrest, an3 upheaval for this

polarized situationn (A3aa. 1971, p, 13). Tn the light of the

reaariable durability and resilience of the apartheid regiae

throughout the 19?Qs, hnrerar, aanp writers have now case to

believe that it is extreaelg unlikely that white-ruled .South

Africa will, in the foreseeable future, succu~bto vialent

opposition, either from inside cr outside the country, It is

claised that the apartheid state is siaply too powerful relative

to its enelrties. For example, Johnson (1977) points out that the

South African governaent is not comparatle ta previous white regimes in Africa, since it does not Sepend upon a metropolitan

country to protect it Eroa the discontent of local blacks:

The South African state is incoeparahly stranger than that of any earliet white societ~in Rftica, Tn the face of possible internal rebellion, at least, white South Africa can look after itself ,,, There is no colonial power to exercize leverage towarns black ma jurity ruf e, The laager is intact and can be Refenderl [Jafinson, 7977, p* 3051.

Johnson specolstea that challenges to the apartheid state originating internally - Ero~black urban workers, the urban unenrployed, or froa rural Rfricans - are unlikelp to succeel in bringing about significant IiberalizatTon, TE the gooernment a3opts a sufficiently ruthXcss policy of suppression at ham,

and an accomeodative, Jaissst-faire approach to its iissediste northern neighbaurs, there is no reason, according to Johnson,

why it should not be able to survive well into the twenty-first centurr (3977, p, 3 tY). This view is corroborated in a study by Hanf, Weiland and Vicrqaq, who aaintain that neither guerilla warfare nor internal de~onsttationsan3 strikes will constitute a serious threat to the existing system of dosination (199'1, pp,

409, Ql!lf, Furthersore, according to Gann and Duignan, South

Africa" industrial strength, its ability to pay for isports in gold and the nature of international trading *leaksw . have rendered the country largely iaauae to formal trade boycotts or sanctions (3978, p, 29). fn 3ohnson9s view, however, ?n~ disaantfinq of apartheid which does occur in the future 4.11 have to be in.3uced froe outside, He bases this opinion upon the historical precedent created bp traasit%ons to black rule in other African countries, where pressure placed upon ainority white regiaes by aet ropolitan colonial coontries was always the catalyst for change (1977, pp, 320-3273, Tt is conceivable that in the future soae foreign power, perhaps the O,S,, say come to adopt an inf araal niaatropolitan role* vis-a-vis South Aftica, but until such tise the South African apartheid state should be able to reist a21 adversaries, Phis view is shared by Gann arid Duignan:

,,, the South African establishment is not Xikely to be dverthrovn for a long tiae to come, if at all, The opposition is diviiied, The aray and the a31~2nisttation are neither inefficient, corrupt, nor subject to rcvolutionatp infiltration ,,, The counttpts ~ilitary expenditures, though i~pressfveby dfrican standards, 40 not constitute an insapportable bur4en, South Africa is not on the point of breakdown {li)fR, p, 62). The idea that the apartheid systea is virtually impermeable to change is based upon the belief that white South ~fricans will solidify into a monolithic and intransigent political bloc

(Johnson, 1977, p, 300). It also tends to deny the rationality of the apartheid systea in the Pace of changing constraints,

Ada% and Gilioiatee (1979) point out that South fifsica*~ ability to change depends upon how the ruling group perceives the costs of apartheid relative to the advantages of abaniloning past beliefs, Xncreased pressure does not necessarily mean that a threatened group will closc ranks in obstinate defiance (8.fant and Gilioaes, 1979, pp. 64, 38l), The agarthe the outdated-- -relic - of a dying colonialism, but is in fact one of - _ the aost advanced--- . and effective patterns of rational, oligarchic doraination [!!-lam, 1971, p, 1, Xn addition, the white constituency is hetetoganous, in the sense that various sections are affected differently by the costs and benefits of particular institutions, and the relationship between these costs an3 benefits ultinately deterinines the potent ial for social chanqe,

This snggests that the elimination of apartheid lstap be possible without requiring a cataclpaic revolution, In ~dan*swords:

ft is likely that the evolutionary chanqe of white South Africa will take place through more concessions under the pressure of increasingly powerful challenges that would otherwise jeopardize white interests altogether through a structural change, The question of transfer of power could develop into a problea of sharing power, not because both antagonists have become less hostile toward each other, but because they both won13 lose more by insisting on the final solution of their hostility than bp settling for mutual concessions on the basis of autuaf strength (1931, p, 168). IE such a reasoned and rational adjustment in the distribution of political power is to take place, the question iamediatelg arises as to the specific institatianal form it is likely to take, The work of the political scientist Rrend

Lijphart (1977) has been particularly influential in shaping the opinions of those who believe in the possibility of evolutionary aenocratizatbon in South Africa, Lijphart criticizes the view that social homogeneity is a necessary condition for deeocratic gavernlilent, and ~oints; to the fact that several "plural societies* in europs are also stable 3csocracies.~ The political system which facilitates such stability is referred to by Li jpbart as wconsociatianal democracyn, The latter is desiqncsd to counteract the centrifugal tendencies inherent in a plural society by providing for cooperatfoe behaviour on the part 05 the laadets of the different segsents of the population,

Consociational 3eaocracy can be defined in terms of four characteristics: fi) government by a wgrand coalition" of political elites uho jointly decide upon those matters af fectinq all groups in costaon; (ii) mutual veto or p*concurrent ~ajoritp rulem to protect vital minority interests; (iii) strict proportionality of political representation, civil service appointasents and allocation of funds; and fiv) a high degree of autono~yfor each segment to run its awn internal aff9i.r~

(lijphart, 1977, p. 25). Pf consociational. dentocracp has worte?

------I------IFor a definition of pluralisa, see chapter 3, section 3,2, The tera "deaocracy" is define3 in a broad sense to denote polparchic decision ~aking, in the Wetherlands, Belgiust, Svitzerlan? and Austria, then

Lijghaxt maintains that it could also be triad in certain less developed countries,

This idea has been seized by soae theorists as a possible mans of effecting a transition from apartheid to an inteqrated nonraciaf society in South Africa, Thus Thowas 11977) speculates that a aovemsnt towards coasociationalis~would be f casible if provided with enough support froa the liberal eleaents within the ruling National Party, the business coamnity, chnrches, black leaders and foreign gavernaents, He recognizes, however, that such a change would be oppose3 strongly by Bang radicals and literals who reject any political dispensation based an racial cleavages, and vould also be resisted by white conservatives, The success of conaoc~ational democracv, according to Thoaas, presupposes that South hftican blacks and international pressure will not allow any long-ter~ strategy which is not based on the territorial nnity of the country an3 a system of ?%ultiracial power-sharing (1973, p, 21). Tn their extensive survey of opinions and attitndes towards social charnqe in South ifsica, Hanf, Veiland and Yietdag (1981) conclnde that the white electorate poses no i nsarmuntable obstacle to the peaceful evoZution of a consociational system {providing the political Zeahxship acts decisively), the^ also fin3 that the black political leadership is seriously prepared to consi4er coepromises along these lines, and that the majority of urban blacks would accept thee, The chief obstacle to change lies with the position of the white power-elite, whfch is oriented towarls the status quo (Ranf, Weihand and Bierdag, 3981, pp. 398-401).

One possibility is that a split may emerge between the literal an3 conservative elements in the white leadership. According to

ScRZeaser, however, such a split is unlikely in the case of the ruling National Party which articulates the broad interests of a "popular social cossunalisaw and is therefore not susceptible to factional divisiveness 11977, p. 10). Hanf, Weiland and Vfetdag believe that the conservative ring of the Vatianal party is most likely to prevail and that a fora of "shaw consociatioalisen

%illbe adopted in ori?er to disguise the perpetuatkon of ainority rule an3 thereby pralonq the survival of the apartheid system (1981, p. 419).

Lijphart hi~self aa~itsthat the likelihood of true consociational deaaacracy easerging in Soath africa is not very great, In fact tijphart, fol3ouinq van ?en Berqhe, identifies

South Africa as one of the rare cases where discrepancies In levels of developmeat are so extrme that one group can easily achieve a sonopaly aver the Beans of violence, which severely reduces the chances of .?lewocracy, even of the consociational variety (1977, pp, 235-235). The reasons for Lijphart's pessiaisa are the same as the reasons why, in chapter 4, we opted for a predatory rather than conttactsrian theory of the South African state,

A nuaber of basic coni3itions for consociational democracy, as identified by lijpbart, are absent in the South African context, For exatwple, tijphart requires that the elites who form

the *grand coalition* be recognized as legitimate

representatives by their constituents (Lijphart, 1977, p, 531, whereas in South Africa thfs condition would probably ha

fulfilled only for the white leaders (Sckle~taer, 1977, p, Iti;

ddaa and Gfliooee, 1973, p, 2901, Another condition for consociational deaocsacp is the existence of "overarchinq

loyaltiesw and '*crosscutting cleavagesa between groups, which facilitates nodesate attitudes and actions flijphart, 3973, pp,

54, 751, It is doubtful that these prevail to a snfffcient extent between black and white South Africans, Li jphart maintains that small countries are wost suitable for consociatianal democracy because a feelfnq of vulnerability snd insecurity provides strong incenti~es to maintain internal sofidarity. Rowever, foreign threats need to be perceived as a coaeon danger by all segaents of the society in order to have a unifying effect (tijphart, 1977, pp, 66-57), and thfs is not the case in South Africa where an19 the whites are threatened (Ida@ and Gilioaee, 1979, p, 3Dl), Also, consociatianal delnocracy requires that the non-elite public be npolitically inerta an3 display "deferential attitudesn towards the group leaaers

(Lijphart, 1377, p, 169)- In South africa, however, blacks especially are beco~ingincreasingly politicized.

We will not enter the debate upon the feasikilitp or likelihood sf consociational desocracy in South Africa. Tt will suffice to note that the new constitution, adoptea in 1'343, appears to vindicate the prediction made by Hanf, Veiland and

Vierdag (1981) that a "sha~ consociationalismw vould be

introduced in an attempt to accoaaodate apposition to the

apa~theidtegiae, The analysis developed in this thesis leads us

to agree with Adam ('197T) and &dam and Giliowse (1939) that the

apartheid syste~Erepresents an essentially rational response of

a heterogenous white oligarchy to the costs and benefits associated with alternative institutional arrangeatents. This 7- - - .- ruling oligarchy is neither monolithic nor intransigent, bat has ------in adjusting institutional changing constraints, 8s particuf ar

aspects of apartheid have becoae too costly to maintain and

defend, they have been abandoned or aoqified, Xf the systela as 3

as to eli~inateall kanefits accruinq

to its protagonists, there is no reason to believe that it voul4

not be dismantled. while these tenefits are relatively simple to " - identify, the costs of apartheid derive f ram numerous sources,

both internal and external, Political pressure aimed at

destroying apartheid can therefore take many different forms and

eaanate fro@ widely disparate groups of opponents, In an

analytical. sense, the effect of increaser3 insurgent activitp on

the borders of South Africa is identical to that of the election

of s Democrat to the U.5, presidency oar the registration of a

black trade union in Durban, Our sodel has shown that all such

influeces say be incorporated in a sitnilar wag in the political decision aatinq process, As indicated in chapter 2 (section 2 one of the characteristics of the so-called nneuw econoaic history has been the application of quantitative techniques to htstorfcal explanation (clioaetrics) . Fogel identifies the fundamental aethodolagical feature of the new econoe%c history as *its atteapt to cast all explanations of past economic develop~antin the forn of valid hypotbetica-deductive sode'ts~ (197 la, p, 10).

In the course of developing an3 testing these ~odels,the new brand of historian Is forced to recognize the intisate relationship between measuresent and theory (Ibid., pa 7). and thus to coabine a strongly empirical orientation with deductive

This Bay be expressed as a theoretical cowmitaent to the validitp of operatisnalizinq every research probke~, considering eost forws of information to be nusbere3 events (observations) in one or nore sequences or classes dependent upon or indepen4snt of other sequences (Rounep and Graham, 1959, p, viii), of course, quantification of any kin4 sust not diminish the historian's control over his aatcrial.

On the c9ntrary, the scholar needs to have the distLnct sense that his control has been increased hefore any quantitative procedure will warrant confidence (Ebid. , p* ix)

This presupposes the existence of an arganizinq theory prior to the employment of any quantitative techniques,

The work of the new econoaic historian is sel3am characterized by the application of the most advance? econa~etricacthods, Sndee4, according to Wright: The distinctive contribution of the New economic qistosy has not been so much the use of mecononetricsn but the Use of ecoqogx~- the application of st~ndard economic reasoning in the posing and answering of historical questions ff971, p. 416).

Hicks (lW?) aaintains th3t the role of economic theory is to provide "gener31 ideasn which can be use4 as a means of ordering historical material, Ever7 historical event has sorrte unique aspect, but raost are also wesbers of larger groups and can thus be discussed in terms 05 the notion of statistical uniformity.

By focusing upon the norfit or average of the group, the econo~ic historian attempts to discover some extra-historical support Eot the observed historical pattern (Hicks, 1977, pp, 2- 31, @right poiats out that aany historical issues have been substantially clarified sitap'ly by analytical thinking an4 measuresent, without the necessity for elaborate quantitative ~ethods,4s lonq as the basic econame tric technique of ?tawing inference fro@ non-experiaental data is used, however, such studies will continue to qualify as examples of wecono~ettic historyn

(Wright, 1971, p, 417).

The anion between seastrrewtent an4 theory is aost clearly evident when the historian alteapts to establish the net effects of innovations, institutions or processes on the course of econoeic dsrrelapment. Phis type af analysis involves a coatpar ison between what actually happeneR and what would have happened in the absence of the specified circuzastance (gee. the construction of a *counter factualw), The econoisic historian therefore requires a set of general stateaents {a theory or a so3eZ) that will enable him to deduce a counter factual situation fro% institutions and reZationships that actually existed

(Fogel, 1911a, p. 8).

Applications of the new economic history and clioaetric methods have substantiallp altered sowe of the best established propositions of traditional historiogra~hp, One of the first an3 most influential. reinterpretations concerns the effects of slavery on the develop~entof the pre-Cfvil War American Santh,

Conrad and "Ieyer (1958) challenged the traditional vie^ that slavery was responsible for retarding the qsowth of the Saath*s econoay and that it was rapidly turning into an unprofitable institution, Their calcu2ations of the rates of return accruinq to slaveownets showed instead that slavery was a viable economic spstea, In a subsequent study, Fogel and Engernsan (1974) hare tested the traaitional hypothesis that, immediately prior to the

Civil War, slaveovriers were extremely pessiaistic about the future of their "peculiar institution9* due ta the impen3inr~ exhaustion of existing cotton lands and the unstable state of the international cotton market, Fagel and Enger~anconstruct 3n windex of sanguinitpm of sfaveauners, which is essential1y the ratio of the purchase price of slaves to their annual average rental rate, They hypothesize that, Lf investors expected a aote lucrative future, the purchase price of slaves would rise relative to the rental tat@ [(19?4, rol. 1, p. 103). Contrary to the traditional view, Pogef and Engeman find that during the

1850s sanguinity was rising xcapii3I.y (accounting for 75% of the rise in slave prices) indicating that slaveowners not only only to test the validity of existinq econoaic thearias, Bat sag even facilitate the Aevelopment of nsu theories:

A~propsintetheory will not just arrive on the scene fufXy fledge3 an3 rea3g for use, Eany eapiricaf regularities rill have to he discovere4 by eapirical work, In the absence of a theoretical fraaework, we introduce certain variables on groung s of guilntitathe ------inotitutionalisa - because we know the variatle is isportant and its effect can be understood 2% pp; bat not predicted q pg~~&(Desai, 1968, p, 7)-

Fritz Bedlich (1955) atques that atae~pts to answer countesfactual questions by the use of hppathetico-deductive aodels constitute both the most novel an4 the sost dabious aethodological aspect of the new economic history, We aaintains that counterfactual propositions are Eundarentally alien to econosic h3.stot y because they are untestable and thus caa~rise at best *quasi-historyw (Be.llLcht 1955, pp, 890-49 1). RedLich refers to the countcrfactnal method rather pejoratively as

*con jecturaf historyw, because it is based on nfiq~entsw, which are assuarptians hawing no counterpart in reality fabid,, p,

Qf3U). Hogever, 3urphj (1965) identifies those features of the new history vhich Redfich finds most offensive as its chief virtues. By rigorously developing hppothetfco-deductiae models, clioaatficians are effectively providing the discipline of economic history with a defensrblc set of empirical techniques

(Rurphp, 1965, p, 145). Br contrast, the *old* econorric history produced wexpl.anationsm which Bid not follow from a train of deductive logicm, nor did they rest on statistica2 inference,

Rather, these Isexplan;ationsN were "urged upon the reader by a

*hole %ass of 3escriptive sentences which attenpted to warrant the acceptance of the *explanation*" (Thin,. p. 136). The stronqest 4ef ence of counterfactual experiwentatton as a legitisate tool of historical explanation has come, not surprisinqly, from Fogel. Re argues that if we are to excluna froa history all those stuaias which ate based an counterfactual propositions, "we rill have to expurgate not only the new work, but much of the old vork as wallm (Fogal, 197 ta, p, 331,

Traditf onal econosic history is full of hidden counterf actual assertions, They occar in any discussion which sakes a 3ep1, social, technological, adeinistrative or political innovation a cans2 of a change in econoaic activity. 411 of these arguments involve iaplicit comparisons between the actual state of the nstion an3 the state that woul3 have prevailed in the absence of the specified circaartstance (fbid, , p. 10) . The only difference between the old and new history In this regard is that the latter tends to make its counterfactual propositions explicit, whereas the foraar does not, In the warns of Cochran: Historians, economic or otherwise, have necessarify approached their work vith at least i~plicit~otlels to guide thea, and all bistbrj is a tissue of presuppositions and resulking conclusions (1969, p, 1566).

In chapter 4 we construct a relatively f arsal sxplanatqrp model of the 3evelopment of the apatthef3 state, and subject it to some empirical testing in chapter 5, Our @@tho3is thus In accord with the recent aove~enttowards cliosetric techniques,

While re do not resort to explicit counterfactual @odeling, we tend to agree with Pogel that there is an element of counterfactual speculation present in any attempt to explain the evolution of social institutions, and this study is no exception, JtPPIIDIX 2~ 1 BUTEP DGSCRTPTXVE SBBIEY OF Pll! llSTPUntlZS OF

liPIRTBEZD POLICY

The legislative and administrative instruments of apartheid qay be divided conceptually into three categories: (i)those providing for the physicax or geographical separation of the races, (ii) those affecting the operation of the labour eartet, and (iii) those measures concerning the averall socio-econarrtic status of blacks, of which discri~inataryeducational policy is tha ~ostit~portant, He ui'lh deal with each of these in turn..

One oE the primary ideological principles of apartheid is that blacks within white areas are to be regarded merely as *temporary sojournersm, who are tolerated only in so fat as they are necessary to the vhite econory fGriffiths and Jones, 1980, p, IUQ), Apartheid itself, however, represents the final stage in a Long process of evolution of racial differentiation and segregationist policy (Bhoodfe and Venter, 1960, g. 243). The earliest contacts betwean black an? white can~unitiesat the eastern frontier of the Cape colony resulted in efforts by the colonial adainistration to establish -native reservesw excLusivelp for black occupation (see chaptex: 4, section 9.1).

Siailar policies of territorial separation were subsequently adapted by the 3oer tepablics north of the Orange River (~hoodie an3 Venter, 1960, p, 92). Restriction on the taovetaent of blacks from tribal districts to white-occupied areas of the country has been achieve3 in a nuoaber of ways - by direct controls an geographical mobility, bg the denial of civil rights within "white* South Africa, an3 by attespting to increase the attractiweness of the traditional black *homelandsn (Grif fiths and Jones, 1990, p, 144).

The gative land act of 1913 contained a schednle of all existing tribal land, sission reserves and sone Rfrican-awned farss, In ter~sof the act, Xfricans were not allowen to acquire land outside the *sckedaled areasu, while non-a fricans could not occupy land within these areas, Another important pfece of early ssg~egationistlegislation was the Ratiae Orban Areas act of

1923, which was essentially a consalidation of 41 existing statutes and ordinances, The act provided aainlp for residential segregation and the control of black inflnx into the cities

{Butt, 3964, p, 123; Eriffiths and Jones, 1980, p, 46; Bhoo4is and Venter, 1950, pp, 123-124). Ilt was succeeded in I945 by the lative Urban Areas Consolidation Act fJoaes an4 Griffiths, 2980, pp. 63-75], Section 10 of this act asf ined the circumstances under which a black person way enter and resain within a prescribed white area, ~pecificallp,no black may occupy such an area for aore than 72 hours unless he qualifies as an nurban blackm, defined as someone nho has resides there continuously since birth or for at least fifteen years, or has uorke3 uninterrupted?.y for the saine employer for at least ten pars

(Griffiths and Jones, 1950, p, 46). The Development Trust an8 land act of 1936 added a nursbex of "released areasw to those scheduled far black occupation in the a917 act, This aa4itional lam3 has gradually been acquired since 1936, and approximately

7 percent sf the total land area of South Africa now consists of scheduled an3 release2 areas,

One of the central tenets of apartheid i3eoIogy is that blacks be peraitted to exercize political self-determination within these areas, The ElacL Authorfties Act of 1951 accordingly coaatenced a process of devolution of local political. authority to the hoaielands, This was followed by the Promotion sf Black Self-Govern~ent Act of 1959, which paved the wap for the Transkei to become the first self-governing black tezsitsry

Ln 1963, It was recognized that if the reserves were to obtain political sovereignty, they would also have to become sore viable econoaically, Tn 1955 the report of the Comwission For the Sacio-Economic Developsent of the Bantu Rareas {Tomlinson Coarn-issionw) recomaended the creation of a class of full-tise faraers settled on econoaical~y feasible Land units, and the siaultaneous establfshaent of non-agrfcultural sectors within the rcseves to absorb the population displlaeed by land ref5m and additional population growth (Rniqht and llenta, 1990, pp,

175-176). In an attempt ta raise levels of output and productivity in the black rural areas, the Promotion of the

Econo~ic Development of Black Ho~eZ3ndsRct uas passed in 2958, . and provided for the establishsent of Economic Develapaent

Corporations to plan, finance and coordinate the aevelopment of the various ho~elands(Griffiths and Jones, 19f30, pp, ?&E!-l89). Governaent policy was alsa changed to per @itand encourage white capital to enter the ha~elandson an agency basis (Knight an3

Lenta, 1990, p, 175). The Black Hornelanas Citizenship Act of

1979 and the Black Homelands Constitution Act of 1973 facilitated self-governing status for a nusber of black territorial authorities in addition to the Transkei, an3 prepared the say for fall political independence, There are now three black states which are noainally independent of the Republic of South Africa,

In order to fsplement the aparthefa ideal of complete separation of the races in all spheres of life, a complicated set of regulations governinq the position of blacks within the

"whitew areas has case inlo existence, One of the key pieces of lagisZation in this regard is the Black (Akolitioa of Passes an3

Coordination of Bocuwents) act of 19"i2, in terms of which every black person over the aqe of sixteen is oblige3 to carry, and produce on dssand, a "reference book" or identity aocuaent, which contains a record of the in3ividual*s emproyment histbry and constitutes the necessary peraission required to rewain nithin a particular *vhite* area (Jones and Griffiths, 1990, pp,

88-90), nR3-l. the typically totalitarian paraphernalia af central, regional, district an3 local Bf rican labour bureaux %as created in 1952 ,,, to supercede the atazcket by outright direction of Plfrican labourw (Mutt, 3964, p, 729). The 1"39 report of the Com~isskonof Tnquiry into Zegislation affecting the Utilization of qanpawer (wRiekert Comissionm) recoarrtenaed that the governaent accept the permanence of urban blacks within

%bitefi South Africa, at least for econonnic purposes if not in ter~sof political affiliation, This led the authorities to consider certain ainor reforms, such as amendrents to the 1945 arban Areas Act to provide for nationwide aobility of urban blacks, and the Relegation of influx control tesgonsibifity to local coamunity councils in black townships, Wfricans are not the only blacks, however, to fall under the aegis of the grand scheae of apartheid, The Group Areas Act of 1966 prohibits any person drow occupying pre~isesin a wgroup ateam which has not been proclaimd for his own particular race group, The practical effect of this law is to restrict the geographical mobility of

Indians and *qcoloutedsf~lpeopleof milred race) within the urban

J42221 l~nrrhcga $92 tiiqqu~mxqs Steenkarap (1983) traces the oriqins of the econo~fc colonr bar hack to the pre-8nion era of diaeand and gold wining, when white workers feared that blacks would be admitted t~ skilled jobs in large numbers, thereby placing 4onnward pressure on skilled wages. Laus were enacted to exclu3e blacks from skilled occupations on the nines of the Pransvaal an3 Oranqe Free State,

The Unian pat1iawentes first colour bat law was the latiye

Labour Regulation Act of 1911, which consolidated earlTer coZoniaZ labour legislation, Xt prohibited blacks fro@ undertaking specified tasks, and thus initiate3 the principle of racial. job reservation (Rhoodie and Venter, 1960, p, 121),

The concept of white labour suFreaacg was entrenched by three acts passed by the Pact governaent in the 1920s (Nattrass,

3982, p, 76; "Jones and CrifPiths, IWO, pp. 23-29), The first of these was the Industtial Conciliation kt of 7922 {amende!! in

19371, vhich provided far collective bargaining anit arbitration of disputes for eiaplo~ees defined to include whites only. In teraas of the act, negotiations between enrplopess and white workers uoul? result in Zegally bindinq industrial aqreements according to vhich the waqe rates applicable to all grades of labour were determined, The Wage Act af 7925 applied to those industries an3 trades in which work~rswere not coveted by the

Industrial Conciliation Bct, Xt established a Vage Boar3 appointed by the Biaister of Labour and entrusted with the task af setting siniau~wages and investigating working conditians.

The third isportant item of inRustria1 relations legisZation at this tiae was the gines and Works Anen3aent Act of 3926, which reaffiraed the principle of race Iiscri~inatioa and job reservation in the mining sector {Houghton, 1973, p, 158). Other early legislative acts that contribute3 to the protection of rshite workers inclu3e the Apprenticeship 9ct of 3922, in terlas of which the conditions laid doun for apprenticeship effectively precluded blacks froa qualifying as skillen artisans. One of the most significant policies introduced bp the Fact government was the concept of "the sate for the jobm. This was usuallp iaplesented in the for% of a standard naqs rate for a particular vork category, qaintaina3 ahova the aarket-cleating level, and

the effect was to prevent the entry of subordinate races or

classes into the protecte3 occupation, According to Butt, the

for the jobn principle was even aoze nettiaental to blacks

than foraal jot reservation or influx control:

It has tended to 3etermine the broad occupstional structure of society by authority instead of the aarket, and on a racial basis instead of by trainable ability (Hutt, 1354, p, 117).

The Xndustsial Conciliation Act was amended in t956. Blacks continued to be excludes ftoa the formal industrial relations framework established by the act, since only uhites were

permitted to belong to reqistered trade unions, Although b'l3ck unions were legal, they could not be registered. The act provided far industrial council aqreeeents between unions and management which could - sti~nlateclose 3-shop arrangements and thereby exclu3e non-union 'labour (mostly black) from certain categories of emaploynent, anti1 1979 (when the Industrial

Conciliation Act was asended aqain to allov Bas the registration of black unions), negotiations between black workers and employers could only be conducted at the level of the indi~i3ual firm, under the provisions of the ?lack Labour Relations

Regulation Act of 1953, This act estabXished black "wotks committeesn in firm with more than twenty black employees,

Begotiat ions uould take place between the works co~~itteean3 mnage~ent, and any disputes woufd be settled by regional committees in consultation with the works conwittee, failing this, the issue would be referred to a Central Black labour Board, or even to the atage Board itself, for binding arbitsation

(Jones and Eriffiths, 1959, pp. 90-9R). Although strikes were

not actually illegal in terms of the 1953 act, the Einister of

labour could effectively prohibit any strike by black workers by

referring the dispute to the gage Roszd for a decision,

Following widespread labour unrest in aatal in 1933, the act was

aaended to allow for the creation of wliahsan coasitteesH at

fir& level, The liaison conmittee differed fro@ the works

cotamittee in that equal numbers of representatives were e9ected

by workers and aanageaent. Tn aadition, blacks were now

per~ittedto sit on the Central Black Labour Board and to bcco~e

Labour Officers, and gerrrmission was grnnte3 to strike on the

saae term as unionized workers covered by the 1956 Industrial

Conciliation act, These measures enhanced the ~apularity of

fi~m-levelnegotiating procedures, and a relatively large nnaber

of liaison coanittees was foraed by workexs an8 eaployers

[Griffiths and Jones, 1.930, p, 161). The governateat hoped that

the liaison coawittee systea would forestall the growth of the

black trade union movement, Rowever, the latter flourished af ter

1973, with a draaatic increase in @embership as black workers realized that they had the power to force change through strike action, The Cosaission of Inquiry into Labour legislation

("%liehafin Conrwissionw) reported in 1979 that "the continued exfstence an3 growth of black unions outside the statutory system of negotiation coul3 well bring extreae stress to besr on the system within a short period of the and pose a graye danger to industrial peace* (Griffiths and Jones, 3980, p, 1631, The

1956 Zndustrial Conciliation Act vas therefore replaced by the

Labour Relations Act of 1979, which extended wewbership of

registered unions first to klacks per~anentlp resident in

*white* areas, and then, in 198t, to all black workers,

including aigrlnts, commuters and aliens (Steenkamp, 1983, p,

85). This provides one more indication of the fact that

apartheid was never a doqnatically unbending set of policies,

but has been applied with a remarkable degree of pragBatis3,

{See chapter, section 3,4, for further discussion of this

point .)

The 1955 version of the Innustrial Conciliation Act contaiaed an important clause which ha4 been @issing from its 1928 and 1937 predecessors - nalrrelyr the infaraous "Section ?F which containe3 provisions for direct racial job reservation

(Rutt, 1968, p. 117). Its function was to enable the Minister of

Labour "t instruct a statutory body (the LnSustrial Tribunal) to

investigate the desirabi'litp of reserving certain classes of work in certain areas for specified race gronps (Jones and

Grif f iths, 1980, pp, 108-1213 , llthough 'by 1975 only 2,s percant of the countrySs labour farce was affectea atrectly by section

77 deterrttinations, the nuatber of those indirectly affected was

probably mch larger because of the uncertainty which the existence of this section created asonq esployers (Griffiths and

Jones, 1980, p, 172). The latter my have been deterred fton openinq certain job categories to blacks if they feared that the government wouZd respond by extending Section 77 to corer their particu'lar in3ostry. In 1979 the report aE the Wiehahn

Coa~ission reco~aended the repeal of Section 77, and the govcrn~ent concurred by oaitting it fro^ the new Labour

Relations Act, Only f i~ejab reservation det eminat5sns continued to retain the force of law, altbough most of these have now been suspended. Once aqain, the rigi3ity of aparthain ideology was belied by its practical application in the face of real-world exigencies,

As we noted above, direct curbs on the occupational mobility of blacks were first introduced in the ~tningindustry,

The ?lines and works Act of 1955 repro3ucerl and elaborated ~ach of the earlier legislation, Tn terms of a series of rsqulations proaulgated under this act, all the ndainisttative and technical positions in the aininq sector, together with numerous jobs involving responsibility an3 supervision, were reserved for

*scheduled personsn only {defined as whites and caloureds), This was achieve? by requiring a wcertificate of coapetencyw for these jobs, while denying the possibility of obtaining such a certificate to non-scheduled parsons (Griffiths and Jones, 1950, p, 379). The statutory colour bar was first introduced to the nowraining sector in 1951, with the Building Workers Act, which prohibited the empfoysent sf black artisans in the construction industty in uhite urban areas, The 3959 lotor Transportation

Wesndnent Act eatpowered the National Transportation Co~missfon to require that seabets of a particular race be employed in spscific transport jobs (Steenkaep, t993, p, 721,

The Slack Labour Relations Act aQ 1969 served not only to reyulate the wooeaent of black workers between the hoaelands sa4 the urban areas through the aediua of labout bureaux, but slan provided Eor effective racial job reservation (Steenkanp, 1453, pp, 69-70). Section 2QA of this act enabled the 3inister of

Cooperation and Development (Eorserly 3antu ARmknistratisn) to prohibit the performance of work or the eaployaent of a black worker in a specifies area, or class of employment, or in tho service of' a specified eaployer or class of saployer, with the proclaise4 intention of defusinq any potential racial hostility or conflict in the field of employeent (Griffiths and Jones,

1380, p. 176). This section was invoked in 1973 to prevent the ersploprttent of blacks in a nunrber of occupatians, such as sales clerk, receptionist, telephonist, cashier an3 typist. Althoaqh these restrictions were withdrawn in 1977, the section rearaina4 on the statute books. While the original 1364 act did provide for the training of blacks as construction workers, it was stipulated that they would only be able to practise their tra4c in the black hoaelands or townships {Steenkaap, 3983, p, 72).

Although the proclaiaeil purpose of the Physical planning an3 Emp'loyraent of Resources 4ct: of '1966 was the encouraqenrent of industrial decentralization, Section 3 of this act works as 9R effective instruaent of job reservation. Tts aim is to re3ucc the inflor of blacks into the aain T&iteff industrial centres by f imiting the number of new Eactories or the expansion of existing ones, Firms which are 3esignaled hy the act as

**locality boun3" are peraitted to hire additional black workers

as required, but those which are non-2ocality bound are assigned a fixed ratio of black to riohite wortcce-ts (Jones and Griffiths,

1998, pa 175). The offSciaZ intention is to encouraqe firrs to decentralize to ateas contiquous to the black hoselands

(so-called mborder areasw) vbere no restrictions are laced an

the number of blacks who my be eaploye8, The most important

iapsct of the act, houevet, has been to inhibit .klack.

occupational aobility, An employer will be reluctant to promate

a black e~plogee to a positiaa preoiousl,y hela by a rehite

worker, since a newly recruited black will then be required to

replace the proaoted worker an3 this will violate the

black-white ratio prescribed by the act (Griffiths and Jones,

The 1966 Group Areas act not only restricts the geographical mobility of Tndians an4 coloureds, but also prevents blacks fso~ holding nanagerial or entrepreneurial

positions, and thus ef factivef y proaotes racial job resetva tion,

The act has been applied in such a way as to prohibit a member of one race group, without a perait, from baing eaployed by a ee~berof another group in the latter's designated ngroup areau, in an executive, professional, technical, ad~inistrative, otanagetial or sapervisorf capacity (Criff iths and Jones, 1999,

pa 377)- R ntlmbez of other 1sgisXatitre ilnpadiaents to black advanceaent or eaployment have functioned as instruments of job reservation, For example, the ~iniwumeducational gualificatfon

required for acceptance as an apprentice was set by the 1944

Apprenticeship Act at a l9veP sufficiently high to preclude most

blacks, In any case, the 1955 Group Rreas Rct situate3 the

aajority of technical an3 vocational colleges in white areas,

thus limiting black attendance, fn acidition, apprenticeship colamitteeo, which rust approve acceptance of all apprentice applications, contain union representatives and generally

reflect the racial policies of the {mainly white) craft unions,

bs a result, in 1977 only 1.9 percent of all apprentices in

'training were black (Grif fiths and Jones, 1930, p. 180), One of the east effective means of achieving racial Job reservation,

however, was the incf usion of closed-shop arranqeaents in the

1956 Endustrial Conciliation Act, Every grade of job covered hp

a closed-shop agreerent wss ef Eectivsfg barred to blacks, since

blacks were 3enie3 meabership of registere3 anions until 1979, A

closed-shop agreement, once published, bccoaes Xeqally binding,

so that pac~visionfor such agreements in the 1956 act aaounted

to another fors of statutory job rescrvltion, With the publication oE the Wiehahn and Wiekert Co~~ission reports in 1979, South Bfrica antere3 a new phase of labour

relations, The Hational ganpover Comeission was constituted in

that year as the chief insttusent of the new dispensation

(Steenkaap, 1993, p, 821, Xnflux control te~ainsin existence,

although the governsent has undertaken to ameliorate some of the

"social problms* create3 hy the system, The tight of blacks to resiae in vhite areas has been accorded some recognition with the introduction of a 99-year leasehold arrangement . fn addition, the restrictions fotaerly imposed on black businesses

have been relaxed, and greater provision has been made for black local governiwnt,

J&2,21 g&ggg&ggg&g& 4g~ngg &QcatiogsL @~~~~g&g&~8

Even in the absence of explicit wage or job discrimination, huaan capital theory leads us to expect racial segraqation of

the labour aarket if one race group is Eatgel7 excluded fro@ attaining higher levels sf education, Krneqer: reatarks 'upon the

possibility of this type of 2iscri~ination:

Since, in educational investment, the recipient of education collects the returns on his skills, it voul? be in white laOorts interests to invast as such public capital in itself and as little in Regtoes, as oossible .,. It is also possible that it might use its ~oting power to saintain a aonopaly of skills.,. (Krueger, 1353, p, 43Q).

Ia fact, restrictions on humn capital Eore3tion bp Blacks in

the f ora of inferiot educational opportinities ~rovided by a

white-doirtlnata3 public schools system have been identitien as iaportant characteristics of a discriminator labour market

(Borcherding, 3977, p, 55). Thus Botcher ding shows that segregation of public education can be an efficient mans of achieving fiscal xedistribution from bf scks to whites, The aecision to provide education collectively requires that each vhite individual obtain agreement frsa other whites to allocate

funds to the education of his child, and the npricen for such agreesent is the education of a11 other whits children, his is accosplisbed by means of implicit loqrollinq by political entrepreneurs seeking office, Ti blacks ale excluded becauss they arc disenfranchised, they will not be part of this logrolling prbcedure, and any black education provided by the white adtninistration can be interpreted as resultinq from a deaand by whites for inputs coap2emantarg to those they own

fBorcherding, 1977, pp, 55-56).

In South Africa, the set of qavernrnent policies .which iapedes blacks from acquiring knonledqe and skills appropriate for modern sector employmnt is identiffed by Knight and Plctrath as one of the aajor instruments of apartbeid, equalled in iaportance only by influx control an3 the homelands palicy

(1977, p, 296). Differential access to education is illustrated by the fact that aore than 90 percent of arban male Africans had coapleted less than eight pe3rs of schooling in 1970, compare? with 20 percent of equivalent uhites, According to the 1970

Population Census, only 18 percent of tbe urban black labour force, and less than 6 percent of rural black workers, possessed a grade 8 e3ucation (Griffiths and Jones, 1980, p, 198; Knight an3 BcGrath, 1977, p, 2491, The high dro~out rate of black childxen results from the inability of their plrents to continue to support the#, Even for those blacks who do wanage to stay in school, the benefits are not as qreat as those enjoyed by their white counterparts:

"Bantu educ3tionm is notorious for its low quality, high pupil-teacher ratios, overcrowded classrooms, poorly qualified teachers not fluent in the aedium of instruction, and rote learning {Kniqht and BcGrath, 3977, p, 2591,

Thus the set of discriminstory expenditure priorities spplie? by the South Africsn gavernstent to education and other public services constitutes one of the most powerful instrusants of apartheid policy, APPElDXX 3: ?O%BAL DEBTTW!308 OP TBE B?!SDLTS PBESEIPED XI

611LPPZB tl

Eaximization of the profit function in equation 3 (chapter Q)

yields the following first-order conditions:

using the envelope theorera (Varian, 3979, p. 268) we can

calculate the following partial derivatives:

- fnls) fBx,XI + Pg.G1)/(1 - Tcf ,(Px,Xll + Pg,Gll) < O

- (A791 Lbl = - 1[2/(Px.X22 + Pg,rE22) > O

(since T22 < 0, G22 < 0)

(820) 'ib2 = - G2/ (Px.X22 4 Pq.G22) > O

- (A221 Zb4 = 1/(1 - Tc), (Px,X22 + Pg,t,22) C 0 - lut = - X3/(Px.X33 + Pg,G33) > F) (since X33 < 0, 633 < 0)

Noting that

we obtain the following: - (a3q x5 = XL(PX.XI + P~J,FI)I(~- TC). (PX,XII + P~,GII) + X2. (Px,X2- + Pq,G2f /{I - Tcj, (Px,K22 + Pg,G22) * X3, [Px,X3 + Pg.G3)/jl - Tc). fPx,X33 + Pg.G33) < 0 The constrained utility maximization ptoble~ facinq white skilled workers is defined in equation 4 {chapter 4)- The resulting first-order conditions produce the fallowing reduce3 fora expressions:

Usiaq 3op" iidentitp ue obtain Lhe folla~fngparttax aerivatioes

(where Rl represents the Lagrangeran multiplier) : (since Uw22 > 0, by the assumptian of aiminishing narginal utilitg of leisure)

furtharwore, since

ue eay derive the following: the ~aximization problen for black skilled workers in equation 5 (chapter U) resalts in the following first-oraax: conditions:

- - (456) Xt: = Xh(•’?x, as, Lbo, TF)

= Ms,hb~. (7 - -Tb)/Px

Dif fereatia tinq these expressions we obtain: - Xb3 = Ws, (1 - Tb)/Px > O

[if we assum that the sarginal utility of the additional income generated by ad3itiona2 hours of work exceeds the narginal disutility of that work)

Soloing the %axi~izationproble~ for black onskilled workers in equation 5 (chapter 4) we obtain the following first-order conditions:

- - (~55) Uu = Xfu(Px, Pg, Uu, Ws, 'Pa, TG, Tb) a (9 - Th).~u,xu(~x, Pq, Wu, Ws, Ta, Tc)/Bx

We can then evaluate the following partial derivatives:

(if we assume that the substitution effect of a price increase, perceived by black unskilled workers, is greater than the incoae effect which resalts ftow increased employsent)

(if we assuae that the positive incom effect of an increase in the unskilled wage rate axceeds the negative eaployaent effect) Tt therefore follows that:

Invoking the aarket clearing conditions qiven by equations 1 and

9, we obtain the fofl~vingreduced for8 expressions: - - (1191) '41' = Xs (Pg, 4u, tho, Ta, Tc, Tw, Tb)

- - (A8Q) Ws = ~s(Pg,Yu, Ibo, 'Pa, Tc, Tw, Tb)

Tn order to evaluate the partial derivatives of the price of X and the skilled wage rate with respect to the exogenous variables, we totally difEerentiate equations 7 sn8 9 (chapter

4). We then define the Ea'llowinq Jacobian:

In the analysis that follows ne will assuae that 131 < 0, The necessity for imposing such an arbitrary restriction upon the sign of this deter~inantderives fro% the fact that nu initial assusptions were made regar3ing relative factor intensities in the two industries and the degree of su5stitutabi'fity between

factors (see footnote IS, chapter 41, applying Cramer's rule we sap now calculate:

if are assam that

whf ch means that there is a zero outgnt ef Eect of a chanqs in the gold price, Far example, the additional output of X produced as a result of a rise in Pq is consuse3 by black workerrs (i,e, the value laarginal prodnct of unskilled workers is equal to their wage). Similarly: - assuaing that 52 - Xu2

assuainq that 3115 > 55

The latter assuaption mans that the negative effect an output of the apartheid preaium (Ta) is greater than its negative effect on black unskilled workers' cansu~ption, Usinq the sace mathod, we say 3Zso evaluate the EoZlovinq: (b95) d$s/d~c < 0

assuming that %6 > %ud

We obtain equation A81 by substituting equations R83 and A8U into equation A2, Sil~ilarZp, we obtain equation 882 bjr substituting equations AB3 an3 100 into equation R3, Xn a siailar manner, we can obtain asttucwreduced form expressions foe:

In order to evaluate the signs of the partial derivatives of these reduced fore functions, however, it i.s necessary to wlke sowe assu~ptionsregarding the relative waqnitades of direct snd indirect effects of changes in exsgenous variables on the endogenous variables, It is also necessary to make certain assuiaptions about the relative do~inance of changes in Px vis-a-vis changes in ws, fn al~astall cases we wirl assuac, first, that direct effects always outwefgh inairect effects, and second, that the effect of a change in the skilled wage rate outweighs the effect of a chanqe in the price of consuatption goods, These assuaptions are admittedly arbitrary, but it is necessary to irtrgose aolse restrictions an the general equili'briura structure of the sodel in order to arrive at qualitative results,

Substituting equations A53 and 884 into equation Al:

In other wards, we obtain a wtrue* reduced farm profit function:

Invoking the assuaptions described above, regarding the relative aagnitudes of r3lirect and inairect effects, and wage and price effects, we eap evaluate the following partial derivatives of the profit function given in equation AtOO: 01 01 -. *rl A A il, a 'Ell 91 W .t: Z JI *: a E w 9, Substituting equations Afll an4 884 into the white labour supply

function (equation A45). us obtain:

- - (ausd) Lra = Zw {Px (,) , Ws (,) , Pw)

We may thus 3erive a wtrue* reduced fosa expression far uhita skilled labour supply: - - fR122) Lrr = LutfPg, Wu, tho, Ta, Tc, Tw, Tb)

Again, invoking the assu~ptionsdescribed above, we Rag evalu3te the following partial derivatives: In an analogous aanner we say calcnlata the signs of the partlal derivatives of the *truen se4uced f orin unskilled labour sapplp function and the utility fanctians of black an? white workers:

Soloing the constrained aaxiwization proble~faced by the rulinq group in equation 10 (chapter 4) results in the first-or3er conditions listea in r?gnations 11 to 15, using Roy's identity. we aay evaluate the signs of the partial aerivatives of these reduced for@ functions, Bowever, it will aqain he necessary, in some cases, to iwpose restictions on the relative maqnitudes of various cross-effects in order to obtain deter~inatequalitntiva results: where

where 82 is the tagrangean ~ultipEierand and the deno~inatar in equation (A134) 5s negative if the second-order conditions are assu~edta hold,

SisliZar3.y: if we assawe that

which is not an unreasonable assnaption since all of these taras are positive except for the second one, which is again not an unreasonable assumption since only the first of these terms is negative, if vc assuaa that if we assune that the aarqinal disutility to black unskilled workers exceeds, in absolute taw, the aarginal utility to black skilled workers, This does not seea ta be an unreasonable assuwption, since black unski1"Led workers nurslerica21y dowinate black skilled workers, so that their disntility is likely to carry greater weiqht,

if the marginal disutility of a rise in Tc has a qrester absolute value for capitafists than for white workers, and where

where if we assulee that the absolute magnitude of the marginal, ntilitq to black unskilled workers conoeqnent upon a rise in Tw exceens that of the aatginal disutility to Slack skilled workers, if we assuse that the ~agnitudeof the sarginal utility to white workers associated with sn increase in Tb exceeds that to employers, N is aefined 3s fallows: if we assume that

And: if ua assuse that

And: APB##W average annual real wage rats of nonwhites asployed in aining, aanufacturing, construction, transportation and goaernaent, in constant (1953) Rands Average annual real unskilled wage rate (wage rate of nonvhites e~gloyedin mining), in constant (1953) Rands Annual average real wage rate of whites eeploped in aining, mnufacturing, construction, transportation and government, in constant (2 953) Rands #u~berof banning orders in force against parsons au~berof blacks enrolled in secondary school, pet 1000 of the total black population Bu~barof black workers involved is strikes and work stoppages 8u~berof students enrolled in black universities {Fort Hare, University of the aorth, Zululand and Redunsa). per 7000 of the total black population Rurber af Indian and coloured adults placed in elaployarent hp labour bureaux, per 1000 of the Indian and colourea population Ratio of the nulaber of caloareds and lndians enrolled in teachers* training colleges to the total coloured and Tndian population Consumez price index {all items), 1953 = 100 Ratio of garternaent defence expenditure {awaunt voted annually to defence bu4get from central qovernsfent revenue account') to gross national product at market prices Real per capita defence expen3itnre (amount voted annually to defence budqet f tom central governrent rsosnue account) , in constant (195 3) Bands DPT !Iumsp variable for the Portuguese decolonization of I974 Duaay variable for the Soveto riots of 1976 Duamp variable for the Durban strikes of 1833 Total number of esigrants leafing South Africa Total nuaber of i~wigcantsarriving in South afsica rJorainal rate of interest an long-term governsent stack Average index 08 totab taxes pa53 ky aanufactuting, aining an3 comercia1 enterprises, 1969-70 = 100 Total nanber of nonwhites esploped in sining, eanuf actnring, c~nsttuction, transportation and central govsrn~ent Total nuaber of whites eaployed in aining, sanufacturinq, construction, transportation and central governaent nuaber of nonwhite students in all universities and univetsitp colleges, per 1000 of the tatal nonwhite population Bonwhite participation rate (ratio of tatax nonwhite eoploynent in mining, sanafactoring; construction, transportation and governaent to tatal nonwhite population) White participation rate (ratio of total white eaployment in aining, mnuf actnring, construction, transportation and government to total white population) lo~berof persons prosecuted for off ences relating to reference books and influx control lumber of persons prosecote4 for af fences relating to reference books and influx control, per tUO0 of* the black population Per capita real gross domestic proauct at factor incolaes in constant (1970) Ranas Par capita real net national incoaae at factor prices, in constant (1953) Rands Maoun t voted annually to defence budget fro% centsal governaent revenue accaun t, in thousands of constant (1353) Rando Real gross doaestic product at factor f ncomes in rtli2lions of canstant (I 970) Rands Total real expenditure by South Aftican governneat institutions in the black homelands, in thousands of constant (1 953) Rands Real gross national proauct at aarket prices in rsf llions of constant {1753$ Rands Real net national income at factor prices in millions of constant (7953) Rands Real nonvage incoae in mi2lions af constant (1953) Rands, defined as the contribution of gross operatfnq snsplus to gross doaestic product at factor prices BPGC Real gold price in constant ft953) Rands per ounce, deflated by the consnieer price index Reall gold ptiee in constant (1953) Rands per aunea, deflate4 by the price of iaports Total real revenue from taxes on ~ining conrpanies, in thotnsands of constant (1953) Rands Xndex of average annual real cash wages of full-ti~edoaestic servants Real wages lost dne to work stoppages by nonwhite workers in constant (1% 3) Rands linear time trend (1945 = 1) Qatio a% reqistered une~plopedto total population {whites, colaure4s and Indians) Ratio of the nuaber of nonwhite e~ployeesto white e~ployeescoverod by ainisue wage detereinations by the Wage Board Ratio of the nusber of nonwhite workers involve? in work stoppages to the nnmber of nonwhites e~plagedin ~ining,~anufactutinq, ' construction, transportation and governnent Ruabar of white full-time students anrorled in South African universities, per 30QQ of the white population ------Source: South ifrica, Department of ~tatistics,fqf8,

gqzgg$g: South Africa, ' Department of Statistics, 1976; Soath african Reserve Rank, 1963-3982,

------Source: South Africa, Departaent of Statistics, 7978, Smr_c2s: South Africa, Bureau of Statistics, 1964, 1956; South Africa, Departaent of Statistics, 1968 3970; South Africa, Departsent of Tnformation, 1979-1983; South African Resares Bank, 1961-1392,

goggc_.e_s: South Africa, Departrnsnt of ~tatistics, 1W8: South African Beserve Bank, 196 1-3382,

------Sources: South Africa, Bureau of Statistics, 1965, 1966; Sauth Rfrica, Department of Statistics, 3969, 1979; South Africa, Department of f nioseation, 1979- 3983; South African Beserve Bank, 1963- 1332, ------Source: South hfrica, Department af Statistics, 1978,

------Soutce: South Rfrica, Departseat of Statistics, W?R,

------Source: South africa, Department of Statistics, 3478,

------Source: South African Reserve Yank, 1961- t982,

zgugs2: South Afrrcan ReServe Eank, 1961- $982,

------Sources: South &frica, Bureau of Statistics, 1965, 1966; Sonth Africa, Oepar tntent of Statistics, 1% 3, 1978; Sonth Africa, Department of Infor@ation, 197Q-1983, ------Sources: South Af tica, Bureau ab Statistics, 3965, 3966; South Africa, Departrrrent of Statistics, 3969, 1978; South Africa, Departeent of Tnfor~ation, 1970-7983,

------Sources: South Africa, Burean of statistics, 1965, 1966; South africa, Departaen t of Statistics, '1-969, 7978; South ~frica, Departsent of Tnformtion, 1974-3983,

------Sources: South Af tica, Bureau of Statistics, 1965, 1966; Soath 8f rica, Oepartaenl of Statistics, 1968, 1978; South Africa, Departaent of Znfor~ation, 3978-1983, ------Sources: South Africa, Bureau of Statistzcs, 1965, 1966; Sonth Africa, Departnent of Statistics, 1968, $978; South Aftica, Departeent of Xnfornation, 1939-399 3,

Sources: South &Erica, Rureau of Statistics, 1965, 1956; South ------I Africa, Bepartaent of SYatistics, t96cl, 1978; Sonth Africa, Depattaent of Information, 1979-398 3, ------Sources: South bfrica, Butieclu of Statistics, 1965, 7966; Santh Africa, Department of Statistics, $968, 2978; South Rfrica, Departaent of Information, 3974-7983; Santh african Reserve Bank, 1961-1982,

BSECSCHS: %U#BER OF BLAC#S GIROLLPD XI SECOlOARP SCROOL, PER 1000 OF THE TOTAt BLACK BQPULRTXO% {+)

------Sources: South Africa* Bureaa of Statistics, 1965, 1966; South Africa, Departaent of Statistics, 3358, 3978 ; South A€ rica. Department of Informtion, 1974-1383: South African Institute of Race Relations, 1955-1982, Observations fox the years 1957 an4 1958 were not obtnine3, and these values are linearl? interpolated,

------Sources: South Africa, Bureau of Statistics, 1965, 1966; South Africa, Department of Statistics, 1958, 1979; South RErica, Depnrtisent of fnforeation, 7974-1983, ------Sources: South africa, Bureau of Statistics, 1965, 1966; South Rfzica, Departmnt of Statistics, 3969, 3973; South Africa, Departeent of Inforaation, 1374-1983,

------Sources: South Africa, Sureau of Statistics, 1955, 1366; Satlth ifrica, Department of Statistics, 1968, 1939; South Africa, Departaenh of Infos~ation, 3974-1983,

------Sources: South Africa, Bureau of Statistics, 7965, 1966; South Africa, Cepartment of Statistics, 1968, 1978; South Rfxica, Departaent of Xnf oreat ion, 1374- 1983, ------SoUEces: South Africa, Bureau of Statistics, 1965, 1956; South Africa, Departaent af Statistics, 196R, 1978; south Africa, Oepartaent of Inforxrration, 19'74-1993; south qfrican Reservo Bank, ?%I- 1982; South African Institute of Race ~elatibns, 1958-1982,

------Sources: South 8f rica, Bureau of Statistics, 1965, 1966; Soath bfrica, Departsent a•’ Statistics, 1963, 3938; South Africa, 3epartaaent of Infornration, 7914- t3S3: Sautfn aftican Res@rq@ Bank, 1961- $982: South African Institute of Race Relations, 1359- 198 2,

------Sources: South Africa, Bur*ao of statistics, 195"; $966; South Africa, Departsent of Statistics, 3968, 1978; South Africa, Depac taent 0% InEorwation, 3970- 1983; Sauth lkf rican Reserve Bank, 1961-1792; Sauth African Institute af Race ~elatians, 1958- 1982,

------Source* * Sonth African Institute of Race Relations, 195%- w82, Banning orders have been enforced unner the Tuppression of Cmrsrunisa Act of 1953, the Riotous dlsssntbllies act of 1956, snc3 the Internal Security Act of 1976, Observations for the years 1957, 1958, 1960 and 1961 rere not obtained, and these values are linearly interpolateil,

1965 2,79486 2,79297 2,84225 3,24635 7969 3,30787 3,25965 3,28025 3,80333 1973 4,32357 4,58379 tr.7997f 4,93752 1977 5,12351 5,13771 5,32075 6,14 165 ------Source: South ifrica, Department of Tnforaation, 1981,

------Sources: South Africa, Rureau of Statistics, 1965, 1956; Solath Africa, Department of ~tatistics, 1869, 1979; South .Rf~%ca, Departsent of Tnformation, 1970-t 983,

(*) Population 3ata require3 to construct per capita series exclude the population of the Transkai after 1977 and of Bophntatsvana after 1978,

f+) Froat 19q5 to 1957 the no~inalprice of qold is assused to bit fixed at R25 par ounce, After 1957 it follows the average of daily fixings in the Lon3on narkst,

(**I from 1951 to 1977 these data refer to the nulrrfrer of persons prosecuted or sent ta trial., Fro% 1978 1981 they include all those persons arrested for ''pasf; 13~"of fences. The relevant laws ate nrainly the f3lack Erban Areas (C~nso'lillation) kt and the Black Zabour g elations ~cgulationAct, or their predecessors (see appendix 2). ~bseevations for 1963 and 1965 were not obtained and these values are linearly interpolated,

(++) Bata for the years 1968 and 1369 were nut obtaineC!, an? these values are linearly inter~olate3.

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