Between 1950 and 1995, the Philippines, Indonesia, and Malaysia each enjoyed periods of booming timber exports. Each had forests that contained trees from the Dipterocarpaceae family – trees that grew tall and straight, resisted wood-boring pests, and could be milled into high-quality lumber and plywood. While Indonesia's forestry institutions were weak, the Philippines and Malaysia had relatively strong forestry institutions, at least initially. Both had forestry departments that were led by well-trained professionals, that enjoyed a high degree of political independence, and that restricted logging to sustained-yield levels.

Yet over time the forestry institutions of all three states broke down. After timber exports began to boom, the Philippine, Malaysian, and Indonesian forest departments lost their political independence; the quality of their forest policies dropped sharply; and each government began to authorize logging at ruinously high rates – as high as ten times the sustainable level. Why did the forestry institutions of these three states break down? And why did these governments become so eager to squander their forests?

The breakdown of forestry institutions in the Philippines, Malaysia, and Indonesia is the central puzzle of this book; in answering it, though, I seek to cast light on two larger puzzles. One is the puzzle of poor forest management in the developing world. Since the 1950s, virtually all developing states with commercially valuable forests – in Latin America, the Caribbean, West and Central Africa, and Southeast Asia – have logged them unsustainably.

THE STATE AS AN ENFORCING AGENCY

In the preceding chapter, we saw how informal institutions emerge, how they are adopted by the individuals, and how they are enforced. Individuals respecting conventions, following moral rules, and adopting social norms cause, as an unintended outcome of their action, the emergence of social order. In close-knit groups, informal institutions suffice to provide stability of expectations and discipline among members, mainly when group members engage in personal relationships. Thus, in primitive societies, informal institutions alone are capable of providing social order, and often such societies can dispense with an additional institution that has the explicit mission of enforcing certain social rules. Does this also hold for societies that grow bigger and in which the relations between the individuals become more and more impersonal?

De Jasay (1995) gives an affirmative answer to this question by pointing out that the so-called Large Group problem “enjoys more generous credit than its intellectual content deserves” (p. 23). De Jasay criticizes the alleged analogy “between social groups with many members and n-person indefinitely repeated prisoner's dilemmas where n is a large number, or the players are anonymous, or both” (ibid.) According to his view, society does not possess the homogeneity that the game-theoretical analogy presupposes. Moreover, society must be conceived as the sum of small groups whose individual members are in fact engaged in contracts and relations with each other.

PSYCHOLOGICAL APPROACH TO MOTIVATION

Motivation is one of the main domains of modern dynamic psychology. The main problem with motivation is that it is an abstract concept and is not directly visible. To explain behavioral changes that are observable we must, according to dynamic psychology, make inferences about the underlying psychological variables that influence these changes. These inferences about an individual's intentions, goals, needs, and purposes are formalized in the concept of motivation.

There are various theories on motivation, ranging from instinct theory to drive theory and sexual motivation. From the great spectrum of theories that account for motivation we will discuss paradigmatically only one: the humanistic theory of growth motivation of Abraham Maslow (1970) because of its wide acceptance among psychologists. He contrasted deficiency motivation, in which individuals seek to restore physical or psychological equilibrium, to growth motivation, in which individuals seek mainly to realize their fullest potential. Maslow constructed a needs hierarchy that consists of the different types of human needs as well as their order of importance. In a bottom-to-top hierarchy Maslow differentiates between biological needs (i.e., for water, oxygen, etc.), safety needs (i.e., for comfort, security, etc.), attachment needs (i.e., to belong, to love, to be loved), esteem needs (i.e., for confidence, respect of others, etc.), cognitive needs (i.e., for knowledge, understanding, etc.), esthetic needs (i.e., for order and beauty), self-actualization needs (i.e., to fulfill one's potential and to have meaningful goals) and transcendence needs (i.e. spiritual needs for cosmic identification).

THE ISSUE OF SOCIAL ORDER

Having given a detailed account of the problem-solving model of individual behavior in Part I of this study, we turn now to the issue of social interaction. Our main thesis is that an application of these behavioral assumptions for explanatory purposes of social sciences must proceed in two steps: First, the rise of an institutional framework must be accounted for, before, in a second stage, the social interaction within this institutional framework can be analyzed. The main idea, thus, is that the whole socioeconomic process is structured and directed through the institutions prevailing at a certain time and place. The set of given institutions provide the proper filter through which social and economic relationships must be viewed. Analytically, this two-stage procedure offers a twin solution to the main issue of social theory: the Hobbesian problem of social order. The problem of social order has its roots in the diagnosed self-interested behavior and the resulting potential interindividual conflict. Since the pursuit of self-interest or the striving for utility increase is an anthropological constant, a permanent source of conflict seems to exist in every society. From this social impasse, two exits seem to be possible: The first concerns the possibility of inventing and following social rules that may restrict the self-interested activity of all or some of the members of society. The second is the realization of mutual advantage in exchange processes.

EXPLANATION OF INDIVIDUAL BEHAVIOR AS THE FIRST ANALYTICAL STEP

Disentangling the mystery of human nature is the most difficult task for anybody who aspires to deal with human affairs. It is this great difficulty that social scientists often try to surpass by not analyzing individual action and behavior directly, but instead by focusing exclusively on aggregates or collective schemes. This technique often proves to be impossible to use consistently, though, since at some stage of analysis the author is forced – by the nature of the subject – to refer, in a direct or indirect way, to assumptions of individual behavior. These assumptions are then made in an unsystematic and often ad hoc way.

Since sooner or later every analysis of society and economy must use explanations of individual activities, it is preferable to start explicitly with the observation and explanation of individual action and behavior. One can hope, then, that more clarity in this manner can be provided. It is better to handle an issue, however difficult, directly and with all available means than to try – in the end unsuccessfully – to avoid it. Because, if this issue is important for the study, then it will appear in another form later in the analysis and will lead to complications or theoretical mistakes.

This methodological doctrine of starting any social analysis with the individual, known as methodological individualism, has so far proved to be successful.

In 1951, the Philippines became the world's leading exporter of hardwood logs. Though heavily damaged by the war, the Philippine forest sector was in an admirable position. Almost half the nation was forested, and the logging industry used some of the most advanced harvesting practices in the tropics. Most important, the timber industry was governed by a forestry bureau with a well-trained staff, a considerable degree of political independence, a policy of promoting sustained-yield forestry, and a reputation for avoiding the corruption and patronage that plagued many other government agencies. Yet, by the 1960s, the forestry bureau had lost its political independence; its policy of sustained-yield logging was all but abandoned; and the nation's forests were on their way to being badly overlogged.

This chapter shows how the timber windfall of the early 1950s led to rent seizing, which in turn led to the deterioration of the institutions and policies that protected the forests.

In 1963, the British colonies of North Borneo, Sarawak, and Singapore joined the Federation of Malaya to create a new state, the Federation of Malaysia. Yet the former colony of North Borneo – now called Sabah – retained many of the powers of a sovereign state, including special control over immigration, religion, language, and land use. It also kept control of its forests, which remained exempt from the federal government's national forestry laws and taxes.

The Sabah government had good reasons to retain authority over its forests: they were densely packed with trees from the Dipterocarpaceae family – the same type that the Philippines so profusely exported. In 1953, Sabah held 2.7 percent of world hardwood market; by 1973, it had captured 20.1 percent of a much larger international market. Sabah was the world's second largest supplier of hardwood logs from 1959 to 1990 – second to the Philippines, then to Indonesia, and finally to its East Malaysian neighbor, Sarawak. Sabah's tiny city of Sandakan became one of the world's leading timber ports. Locals claimed it had more millionaires per capita than any city in the world.

Sabah's spectacular growth as a timber exporter, however, went hand-in-hand with the deterioration of its forestry institutions.

EVOLUTIONARY ECONOMICS, GERMAN WETTBEWERBSTHEORIE, AND AUSTRIAN MARKET PROCESS THEORY

Up to now, we have dealt with one of the two main deficits of the neoclassical theory, that is, the neglect of institutions, and we have shown how the institutional framework can best be incorporated in the analysis of the market phenomena. In this chapter, we shall try to eliminate the second deficit of the neoclassical economic theory, that is, its unsatisfactory way of dealing with novelty. Thus, we shall defend the idea that market competition is an evolutionary process. The starting point of such a theory of evolutionary competition is the fact of the division of knowledge among market participants that is concomitant with the division of labor in markets. If one takes the issue of subjectivism seriously and acknowledges that economic agents differ not only in their wants but also in their knowledge, then a theory of the market must not only provide an account of how this variety of knowledge is generated and transmitted, but also explain how it grows in competitive exchange settings.

Since the time of Hayek's formulation of the central problem of economic theory of “how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs etc.”