Home > A Theory of the State > The Role of the State

The Role of the State

A while ago (before this blog existed) I wrote down the basic outline of my theory of the state and then forgot about it.  I want to post a simple model explaining why we should be frightened by the Laffer curve but first I am dusting this off to build some context.  I will post it in several (I think three) installments followed by the model.

The Role of the State

                 Government serves an incredibly important purpose economically.  It is important to realize that government is a concept that has developed naturally out of a state of nature in which people stand to gain from its creation.  To see this, consider the fictional situation of some primitive men with no organized government.  One man is a very good hunter and another is a good forager.  Since both men would prefer to consume some meat and some vegetables, there are potential gains possible if the hunter does all the hunting and the forager does all the foraging and then they trade.

The problem is that the process of trading is likely to be very tricky.  Let us imagine that the hunter is also a better fighter than the forager.  If the forager approaches the hunter and offers a trade, it is not necessarily in the hunter’s interest to take the trade because he has a third option which is to simply take the produce of the forager and give him nothing.  There is nothing compelling the hunter to offer a mutually beneficial trade to the forager.  To take it a step farther, there is nothing preventing the hunter from going out of his way to track down the forager and take his stuff. 

This is likely to have several effects on the behavior of the forager.  First, the inability to trade will cause him to spend some time hunting, a task at which he is comparatively inefficient.  Second, he will refrain from saving a significant amount of assets because they will be at constant risk of theft.  Finally, he will probably invest some effort into defending whatever assets he does accumulate.  This may take the form of hiding them, or getting better at fighting, or living in a place which is easily defended but is inconvenient for other reasons. 

These costs may seem small by themselves, but consider that the economic development of society is dependent to a very great extent on specialization.  This situation allows for almost no specialization.  There is one type of specialization that is lucrative here though.  There is one skill that is capable of providing all manner of goods equally well.  That is the skill of combat and theft.  If the hunter decides to specialize in theft, he can steal from other hunters as well as foragers.  So in this state of anarchy, there is likely to be a very great deal of combat and theft and a very small amount of production (and almost no savings). 

Now at some point, a particularly sharp thief is likely to realize that there is a way to do his job which is easier and more lucrative.  Instead of beating up (or killing) the hunters and foragers and taking everything they have, which imposes some cost on the thief and ensures that they will never have much, the thief can just use the threat of beating them up and take only part of what they have.  The victim may be enticed to comply, since they are likely to lose a fight and come out even worse if they don’t.  This will save the thief the cost of the fight, and more importantly it will allow some incentive for the victim to accumulate wealth since he will be able to keep a portion of it rather than lose it all to the thief.  In this way, the thief may eventually be able to get half of 4 rather than all of 1.

In a sense, this behavior by a thief is similar to that of the first farmer who comes upon a wild plant, and instead of devouring the whole thing, realizes that he may devour some now and plant some in anticipation of its later produce.  Just as the farmer, following this revelation, will have to devote some energy tending to his crops, the thief will find it in his interest to protect his hunters and foragers from pests which may threaten his harvest.  After all, the desired incentive to produce would be ruined if, after the first thief takes only half, another one comes and takes the other half.  So some measure of protection will be required.  But this is exactly the field in which the thief is already specialized.  So his efforts will be diverted away from fighting with hunters and foragers and toward fighting with other thieves.  In return for this service, the hunters and foragers under his protection will willingly (that is, without a fight) surrender to him some portion of their produce.

At this point we have a government.  Of course the exact course of events that lead to this situation may vary, but this illustrates how people acting in their own interest may move from a situation of anarchy to one with governance.  And it is important to point out that both the governor (who started out as a thief) and the subjects (who started out as victims) end up better off under this arrangement than they were under anarchy.  More importantly though, is the fact that this situation now allows for economic progress.  That is because people now have an incentive to invest and produce more because they will get to keep some of the benefits.  Furthermore, they will be able to trade.  This is because the governor is in a position to enforce contracts.  So if a forager wants to trade with a hunter he needn’t fear the hunter seizing his goods because there is a third party enforcer who has an interest in preventing this.  This ability to trade allows for specialization which leads to innovation which means progress and greater wealth for all.

So now we can take a step back and ask what is the essential role of government that is necessary in order to have a stable and productive society?  The answer is the establishment and enforcement of property rights.  To analyze this we need to define the term property rights.  For this I turn to Barzel who distinguishes between two types of property rights.  The first, which he attributes to Alchian and Cheung, and refers to as “economic property rights” can be defined simply as the ability to enjoy a piece of property.  The second, he calls “legal property rights” which he describes as what the state assigns to a person. 

The distinction is important.  To see the difference, note that economic property rights exist even in the absence of the state.  The forager living in a situation of anarchy retains some ability to enjoy the produce of his labor.  This ability is limited however by his ability to defend that property from thieves.  The purpose of legal property rights is to extend economic property rights at a lower cost.  In other words, the state, once established, will delineate some legal property rights by declaring that the forager has a legal right to use the produce of his labor as he wishes and nobody else has the legal right to take it or otherwise interfere with his enjoyment of it.  The state then must enforce this legal right with a threat of punishment in order for it to have any effect on economic property rights.  If the state just said that, but did nothing to someone who ignored it, then it would not stop a thief from taking it anyway and the forager’s economic property rights, again, would exist only to the extent that he was able to defend his property himself.  If however, the state threatens to punish a thief, and because of this the thief is unwilling to steal from the forager even if the forager does nothing to defend his property, then his economic property rights are secured without any particular individual effort to secure them himself.  The effect of these legal property rights is that the forager’s economic property rights will be much more extensive and he will be able to devote the effort that would otherwise have been used in securing his property rights to more productive endeavors.

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  1. July 28, 2010 at 10:44 pm
  2. January 18, 2012 at 1:13 am

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