The Role of the State

The Role of the State 2024 Is there a dichotomy? 1 State as benevolent planner 2 State having its own incentive problems? 3 State, market, and welfare losses (a) Arthur Pigou (b) Ronald Coase (c) Gordon Tullock (d) Anne Krueger 4 Political philosophy What is a state? 5 Key questions • What is a State? What is its role? • How/why did it arise, how/why it persists, and how/why it fails? • Is there a positive correlation between the advancement of human civilization and the degree of its organization through a State? 6 Origin of the idea of Nation-State 7 Political philosophy: Beginnings (a) Samuel Pufendorf 8 Political philosophy: Social contract (a) Thomas Hobbes (b) Jean-Jaques Rousseaeu (c) John Locke 9 Political Philosophy: Socialism and anarchism (a) Karl Marx (b) Mikhail Bakunin (c) Lysander Spooner 10 Theories of the origins and development of the state What is a State? Max Weber, 1919 “human community that (successfully) claims the monopoly of the legitimate use of violence within a given territory.” 11 Conceptual problems • Depends on the definition of territory. • At a world stage, there is no State. At a local stage, States may exist everywhere. • Coercion/compulsion distinctiveness? • Difference between private clubs and States 12 Characteristics of the State Weber provides a theoretical definition for a historical category. • What do States do? • War and provision of public goods. • How do States finance themselves? • Domain and taxing States. 13 What do States do? Charles Tilly, 1975 “War made the State, and the State made war.” 14 Expenditure on Warfare 15 Role of the State according to Tilly • Warring: Eliminate external threats and rivals to their power. • Consolidation: Eliminate internal threats and rivals to their power. • Protection: Eliminate threats to the general population. • Extraction: Secure resources from the general population. A subtle division among social classes emerges: The elites who wield influence over the State, contrasted with the remainder who contribute to its maintenance. 16 State spending and sources of income Joseph Schumpeter, 1918 “the fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which the results are put.” 17 Taxes 18 State and racketeering St Augustine, City of God (5th Century) “Indeed, that was an apt and true reply which was given to Alexander the Great by a pirate who had been seized. For when that king had asked the man what he meant by keeping hostile possession of the sea, he answered with bold pride, What you mean by seizing the whole earth; but because I do it with a petty ship, I am called a robber, while you who does it with a great fleet are styled emperor.” 19 State’s incentives Mancur Olson’s framework to understand origins of the State: • Roving bandits predate and keep on the move. • Stationary bandits predate and stay in place. • Stationary bandits are incentivized to allow their prey to amass wealth, thus initiating a gradual alignment of incentives between both parties. These dynamics sow the seeds of transition from warlords to governors. 20 Acemoglu-Robinson’s narrow corridor 21 Madisonian paradox James Madison, The Federalist No. 51 “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In forming a government which is to be administered by men over men, the great difficulty lies in this: you must first enable government to control the governed; and in the next place oblige it to control itself ” Juvenal, Satires(2nd Century AC) “Quis custodiet ipsos custodes?” 22 Douglass North’s framework The basic problem of managing violence is to achieve cooperation. • Natural state ⇒ Violence trap. • Limited access orders ⇒ Coalition rules at the expense of others. • Open access orders ⇒ Clear rule of law. 23 Avner Greif’s framework 24 State capacity and social liberalism The scope of the state Once we see the State as a desirable way of organizing human societies, we still need to discuss its proper scope and its potential for transforming itself and the society from which it arose. • Is the State an exogenous agent or endogenous agent? • Public Finance, Edgeworth’s take: State as an entity that intervenes in the economy to maximize a social welfare function. • Public Choice, Wicksellian take: State as an institutional framework that governs human relationships. 25 Taxation as political process Knut Wicksell, 1896 “taxation in the modem state has come more and more to depend upon the legislative assembly, which is nothing if it be not the representative of the interests of the taxpayers. It would be strange indeed if taxation by interested parties should not result in taxation according to interest.” 26 Increase of taxing capacity 27 Public finance and public choice frameworks (a) Francis Edgeworth (b) Richard Musgrave (c) Knut Wicksell (d) James Buchanan 28 How we perceive the State has changed? Process of legitimization: • Is it an illegitimate organization extracting wealth for self-enrichment or an organization levying taxes to fund public goods? • Are we paying tributes to a lord out of fear, or are we paying taxes to the IRS because of a social agreement? • Both an economic and cultural transformation needs to occur: • Recognition of the advantages of organization through state legislation, which aims to minimize transaction costs. • An increasing identification of the government with cultural traits associated with the people that support said government (Nation-state). 29 From illegitimacy to legitimacy St. Augustine, City of God (5th Century) “Justice being taken away, then, what are kingdoms but great robberies? For what are robberies themselves, but little kingdoms? The band itself is made up of men; it is ruled by the authority of a prince, it is knit together by the pact of the confederacy; the booty is divided by the law agreed on. If, by the admittance of abandoned men, this evil increases to such a degree that it holds places, fixes abodes, takes possession of cities, and subdues peoples, it assumes the more plainly the name of a kingdom, because the reality is now manifestly conferred on it, not by the removal of covetousness, but by the addition of impunity.” 30 Taxes and legitimacy 31 Culture and legitimacy 32 Building cultural identity 33 Can the State change the rules of the game? Aristotle, Nichomachean Ethics (4th Century BC) “lawgivers make the citizens good by training them in habits of right action—this is the aim of all legislation, and if it fails to do this it is a failure; this is what distinguishes a good form of constitution from a bad one” Adam Smith, Theory of Moral Sentiments (1759) “The man of system... is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it... He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” 34 Justification for increasing taxes: Wicksell’s unanimity rule Knut Wicksell, 1896 “Whenever this or that type of public service is expanded, the individual will reap a certain utility, be it of a selfish or altruistic kind; and this utility may appropriately be described as the marginal utility of the public service for our individual. Now it is correct that efficiency requires approximate equality between this marginal utility and the price (or tax) paid therefore. Otherwise the individual would desire a restriction or further expansion of the public service and related expenditure. However, the actual scope of the public service is not determined by the evaluation of the single individual, but by that of all (or at least all voting) members of the group. Equality between the marginal utility of public goods and their price cannot, therefore, be established single individual, but must be secured by consultation between him and all other individuals or their delegates. How is such consultation to be arranged such that the goal may be realized.” 35