Bryan Caplan is skeptical of the state capacity literature. I believe that state capacity is important. Unfortunately, everyone I have read on the subject gives an unconvincing explanation for its importance.
Timothy Besley and Torsten Persson, the economists who write most frequently on the subject, argue state capacity is important for two reasons. First, the ability to tax leads to states providing public goods. Second, the ability for the state to provide a legal system encourages investment.
The importance of public goods seems overstated. Robert Fogel found that railroads, many of which were built privately, only increased GDP by 2.7% in 1890. Given the relative importance of railroads compared to other public goods, it seems unlikely the ability to pay for public goods is the important aspect of state capacity.
Similarly, the provision of legal services by the state is unconvincing. Daron Acemoglu and Simon Johnson unbundle institutions, distinguishing between private property and contracting institutions. Private property is protection from the state while contracting is protection from private predation. They find protection from the state is far more important for economic development than protection from private predation. People don’t need the state to protect property rights, only to get out of the way.
So, in spite of this, why do I believe in the importance of state capacity. As an aside, I claim no originality, this is my reading of Douglass North and I am confused why no one else seems to have picked up on it. State capacity is important for controlling violence. A weak state is unable to effectively control violence. As such, it is beholden to numerous groups. These groups support the state because the state provides them with rents. A strong state is far less beholden to such groups. As such, a strong state is able to allow for economic freedom. A weak state is threatened by the wealth economic freedom creates.
Further considerations must be made. State capacity is not a good thing in and of itself. It must co-evolve with constraints on government. State capacity without such constraints results in Nazi Germany. However, too weak state capacity results in the modern Congo.
Lastly, to answer a question put by Peter Boettke on Facebook. Why do I believe state capacity is an important part of the explanation of the success of Western Europe? My reading of the history of the late middle ages is that the primary advantage of the modern nation state was its ability to crush local monopolies. England, as John Nye points out, had higher tariffs than France for much of the 20th century. The advantage of England was its internal free trade. State capacity ensured goods could move freely in England, when prior they would be taxed at every semi-autonomous jurisdiction.