A
Neo-Classical View of the State
Part I: the importance of the State
Essential for economic growth
But also a source of man made economic decline
Application of economic analysis to states
Public choice economics
Research into Economic organization, and Political Organization
A theory of the Firm, a theory of the state
Day to day decisions
Vs. long term decisions
How do states create and determine property rights
Part II: Defining a state
“a state is an organization with a comparative advantage in violence, extending over a geographic area whose boundaries are determined by its power to tax constituents.”
Contract Theory – An extension of neoclassical theory
- Benefits from everybody constraining behavior
- Benefits of growth lead to property rights that promote it
- Explains gains from initial contract, but does not explain subsequent behavior; actions after the distribution of property
Predatory Theory
- A theory of groups or classes, who exploit others
- Monopolistic power, to extract economic rents
- Explains extraction of rents, but ignores gains that can be obtained through contracts
Both theories are variants of a greater theory; a theory of property rights. What is important is the disparity of power
The North Model attempts to explain
- why inefficient property rights occur, often for long periods
(Neolithic
villages,
- why you do sometimes see economic growth, for long periods of time
(Phoenicians and Greeks, Romans, Dutch)
- why none-the-less, ultimately these states decline and fall
(Romans, Chinese Dynasties)
Rules of the State
- the state trades a group of services, (protection and Justice), for Revenue. Protection and Justice have increasing (for a range) returns to scale, so society as a whole gains. (part III)
- The state acts as a discriminating monopolist, establishing property rights for each group, that maximizes its revenue. (part IV)
- The State is constrained by the opportunity cost of its constituents, who can always try to obtain the services (protection) of a different state. (rivals within or without the state) (part V)
Part III: the State provides Justice and
Protection
One, the state provides the rules of the game (written or not).
Example: Roman Law,
Example: Greek city-states
Example: Feudal Manor
Example: Castes
and Two, given the above, the state seeks to reduce transaction costs so
as to maximize societies’ (and thus its own) total wealth
Example: Legal codes and laws
Example: Castes, and the rules about intermarriage
Implications: Oppression is almost always preferable to Anarchy
- There is tension between maximizing societies output, and maximizing the rulers revenue. Example: slavery in the Roman system, or the medieval manor.
- Creating the infrastructure to create this system involves delegating power. The agents have different utility maximizing curves then the ruler. We can predict the subsequent bureaucracy by looking at the transaction costs of compliance and monitoring. Example: tax farming, income tax, VAT
- The cost curves the state faces in providing justice and protection differ, some aspects are pure public goods, others are subject to the law of diminishing returns. Examples: Roman Trade, Phoenician city-states, Manors (rent), Hydraulic Societies, Labor Societies
Part IV: the state acts as a predatory
monopolist, setting up property rights that reflect the various activities
going on.
Diverse groups of activities within the economy, that reflect
Resource base
Technology
Population
The Ruler attempts to measure the inputs/outputs of each separate activity, to maximize his rents. Depending on costs of monitoring, different property rights will result
Example: standard weights and measures; Money, axles
What we see is that over time, as the costs of monitoring different activities has varied, so to has the form of government adopted.
Example: Roman/allied soldiers, English/American common law
Part V: the state is
constrained by the availability of other suppliers of Protection and Justice
The
Ruler has rivals. For external
rivals, when they are far away, the state will be despotic (
The
Ruler has Rivals. For Internal
rivals, opportunity costs depend upon how much power has been delegated, and in
what form. (Roman Generals in
VI: The dynamics of the Model (and its
destabilization)
Two constraints; a competitive constraint and a transaction constraint, apply to the ruler. As such, he will usually adopt inefficient property rights
Generally, the more powerful a group in society, the easier to defect to an alternate ruler. As such, the ruler has to defer to them regardless of its economic consequences. (feudal Kings)
Generally, the transaction costs of monitoring efficient behavior is high. Thus, constraining people into doing inefficient, but watch-able, behavior is the rulers profit-maximizing solution. (slavery, Feudal dues)
From the above: growth is destabilizing. When property rights promote economic growth, said growth changes prices and conditions. When that happens, power relationships change, and pressure for social change ensues. (the black death)
The pure contract case only emerges when power is decentralized, and roughly symmetrical
VII: The dynamics of the Model (and its
destabilization)
No growth is destabilizing. Other societies are growing, and if you don’t grow, you will fall behind.
The linkage between military technology, and changing states. (the stirrup, the longbow, the Portuguese Caravels)
How to change the state over time? Revolutions, coups, mortality.
Examples: change in the Greek City States – Despot, monarchy, oligarchy, democracy – due to external threats and the hoplite/phalanx
The Romans changed it, with the professional legion.
Throughout most of history, the important issue was landed wealth – since most economic activity was centered on agriculture.
Summary
Trade
protection and justice for revenue
Provide
protection
Which
is subject to economies of scale
Reduce
transaction costs
Set
property right to maximize own revenue
Provide
Public goods (maximizes societies gains)
Set
property rights, depending on transaction costs
(where
is surplus being produced, and how to gain it)
Constrained
by availability of alternative sources of power
Placate
or please the powerful, or those who can escape, enslave others
Revenue from tax on land – collected as labor (transaction cost of supervision)
Ethnically and geographically constrained
A God-King, absolute ruler, with a priest class as his agents
No where to run, workers as virtual slaves, priests as powerful slaves
Public Goods – irrigation, pyramids and temples
Instability from the outside world……
Revenue from tribute
Scale economy from chariots, a victorious army can threaten all
Rule through terror, the ruler’s agents were the warrior class
Political strife, internal threats, no federalism
Alternate rulers, or run far, far away
Public Goods, almost none…
Greek city states
Revenue from trade, manufacturing taxes
Military technology, originally chariots and warriors
Later, the hoplite citizen soldier
Government, eventually a democracy (with much slaveholding)
Government provided trade protection, physical protection (city walls, navies) and laws, citizens voted on all the laws. Geographically very constrained. (declining returns to scale from expansion, given govt. and military technology)
and Macedon
Increasing returns to scale from military protection – the Phalanx vs. the Hoplite
New scale required new government – Alexander the great
Costs of Administration
The
Revenue from land
Technology, as per the Greeks
Later, the legion, more professional, more offensively oriented.
Conquest led to tribute; money and manpower
and increasing returns to scale
Professionalization of the military….
Different leadership then the Greek city-states
The
Increasing returns to scale from trade
Public goods; law, cities, specialization (civic improvements)
The transformation of the political institutions
People, plutocrats, nobles and generals – towards absolutism
Administering the empire
Tax farming (transaction costs of direct rule, and threat of rebellion)
Rotating governorships
Wider base of power, due to gains from trade – Not the Assyrian solution