Author: marklutter

Why state capacity matters

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.

Network

Networks, the internet, and Coase

I am reading The Revolt of the Public and the Crisis of Authority in the New Millennium by Martin Gurri. It is about the spread of networks and how they challenge traditional hierarchical organizations. So far, it seems to fit into the broader narrative of the decline of traditional types of authority, being replaced by networks. This narrative includes the spread of the sharing economy, Uber, AirBnB, the blockchain, Bitcoin, as well as the loss of trust in governments.

While reading I had a realization, that in retrospect seems obvious. However, I have yet to read anyone else make the claim I am about to very explicitly, so I feel it is worth blogging about.

The decline of hierarchy and the growth of networks fits perfectly into Coase’s theory of the firm. Coase, in his famous 1937 article argues that firms exist to reduce transaction costs. What he calls firms can be interpreted more broadly as hierarchical organizations, including the traditional nation state. The spread of the internet has lowered transaction costs. The benefits networks at the expense of traditional hierarchies. No longer do we have to book flights through a trusted travel agency, we can get them directly from the airlines. We can buy goods from anonymous strangers because a rating mechanism guarantees their trustworthiness.

The ability to network has empowered people to circumvent the firm. Coase asked, why have a firm, why not contract everything. As transaction costs fall more people will contract, rather than use a firm. Perhaps the most interesting aspect is we have yet to fully exploit how the internet can lower transaction costs. Electricity took 40 years to be fully integrated into everyday life. If we assume a similar time frame for the internet we can expect another 20 years of innovation, much of it being geared toward lowering transaction costs. How firms, and more interestingly the nation state, evolve in response should be watched closely.

Private cities around the world

The PanAm Post was kind enough to publish a piece I wrote about private cities around the world. Below is an excerpt.

First, private cities could provide better administration of public goods (e.g. security, roads, sewage, and clean water), because the income of the developer is linked to his ability to attract residents. City owners are incentivized to provide valuable goods and services.+

The second, and more important reason, is that private cities incentivize institutional change. Economic freedom leads to economic growth, which increases the value of the land on which the city resides, benefiting the developer. As such, private-city owners have a strong incentive to lobby their central or state governments for a degree of institutional autonomy to increase their competitiveness.

The Honduran ZEDEs, though not as far along as projects mentioned in the piece have the most potential as they have the most institutional autonomy. Honduras has even inspired their neighbors, El Salvador and Costa Rica to begin to consider laws of their own to allow institutionally autonomous zones.

The spread of private and/or institutionally autonomous cities is happening faster than I expected.

Private cities and state capacity

Last summer I took a bus from Honduras to El Salvador. The bus left at 6:00 AM because, I was told, if it left later it would cross the border in the dark and risk being robbed by highway bandits. A few years ago, I took a bus from Lima to Pulcalpa, both in Peru. In the Amazon we stopped and a man in army fatigues with a rifle strung over his shoulder boarded and asked for “donations.”

I bring these stories up to illustrate the importance of state capacity, which can simply be defined as the ability of a state to exercise its power. In the above situations state power would ensure I wouldn’t be robbed or asked for “donations” by men with guns. One tyrant is often better than many. State capacity also means the ability of the state to complete certain tasks, build a road, effectively tax subjects, etc.

The recent Ebola crisis offered a useful perspective on state capacity vs. private city capacity. An 80,000 person rubber plantation run by Firestone successfully stopped Ebola, despite having no prior experience with such diseases. Instead they simply used common sense and extensive googling to figure out how to best respond. The whole article is worth reading if you haven’t already.

Garcia’s team first tried to find a hospital in the capital to care for the woman. “Unfortunately, at that time, there was no facility that could accommodate her,” he says. “So we quickly realized that we had to handle the situation ourselves.”

The case was detected on a Sunday. Garcia and a medical team from the company hospital spent Monday setting up an Ebola ward. Tuesday the woman was placed in isolation.

“None of us had any Ebola experience,” he says. They scoured the Internet for information about how to treat Ebola. They cleared out a building on the hospital grounds and set up an isolation ward. They grabbed a bunch of hazmat suits for dealing with chemical spills at the rubber factory and gave them to the hospital staff. The suits worked just as well for Ebola cases.

The lesson which should be learned is that though institutional change is hard on a whole, institutional subcontracting can work. Trying to better Liberian institutions could take decades for such results. On the other hand, a private city with an interest in the well being of its residents can deal with a deadly epidemic better than most governments. It can probably do other things better too.

Thoughts on the NFL abuse scandal

The NFL is being forced to backtrack and install harsher penalties following the outrage of the video of Ray Rice knocking out his wife being released and Adrian Peterson being indicted for child abuse. While the attention has focused on both instances of abuse as well as the response of the NFL, I would like to consider the broader cultural implications of the story.

First, I think the outrage is driven by a certain cultural elitism. When Roman Polanski was arrested for raping a 13 year old child in Switzerland in 2009 after spending 30 years hiding from justice the public outrage was muted. In fact, numerous well known movie and television personalities expressed their support for him.  Despite this, there was no conversation about the moral failure of Hollywood. The NFL is being excoriated in the media, not for defending Rice and Peterson, but for not punishing them harshly enough. Part of the reason for this different treatment is that sports fans and players are seen as unsophisticated. They need to be told how to act while famous movie directors are the kind of people the media enjoys talking to at cocktail parties.

The second point is the blurring of the line between private and public. The NFL, not the police, is expected to punish Ray Rice for assaulting his wife. Or, if the law treats domestic violence too lightly. Then the focus should be on changing the law, not the NFL. That people, especially the liberal elite, are expecting a private actor to punish what is a public crime, especially because the public punishment failed, is somewhat ironic. Especially so because it contributes to the conflation of public and private, a distinction I imagine they would assert they want to keep.

Lastly, from the target of the outrage and the response we can infer several things. First, private monopolies are extremely sensitive to public pressure, though the NFL is especially so because it is in the entertainment business. The NFL changed their domestic abuse policy after the outrage and pressured Adrian Peterson into not playing.  Second, public monopolies such as the police force are not responsive to public pressure. There has been no additional attempt to prosecute Ray Rice in spite of the outrage, though that is probably a good thing as we do not want justice to be swayed by public opinion. Third, those arguing for additional sanctions on Peterson and Rice implicitly understand the marginal benefits of targeting their outrage at the NFL over the justice system.

Sometimes smaller is worse

While I am a huge fan of decentralization, it is important to be cognizant of the potential negative effects.  Proponents of decentralization argue that local governments are more responsive to the needs of people.  However, local governments can be dominated by local special interests, restricting the overall level of freedom.

This tension was apparent during the drive to Burning Man.  Many towns would pull over cars, ticketing them for any perceived traffic violation.  This would have no negative effect on the elected officials as out of towners don’t vote.  A more insidious example is Ferguson and the broader St. Louis area.  They weren’t ticketing one time passers through, but oppressing an entire population, keeping them impoverished.

Zoning restrictions are another example.  Japan decides zoning policy on a national level, and as such, Tokyo has cheaper housing prices than San Francisco.  This is because the property owners in Tokyo are unable to effectively lobby the national government, while San Francisco property owners are much closer to the relevant decision making body.

This point can be brought back the the 16th, 17th, and 18th centuries and the building of the nation state.  One of the primary advantages of the modern nation state was its ability to crush local monopolies.  Rivers which previously had tolls every mile for a different fiefdom would be traveled at much lower cost.  By crushing the local monopolies the modern nation state created a free trade zone within its borders.  This allowed Britain to experience the industrial revolution, overtaking the rest of Europe, despite having higher tariffs than France.

The question advocates of political decentralization must ask is, under what circumstances will the benefits of local governments outweigh their costs? Moving cities is already much cheaper now than previously, increasing the elasticity of demand for local governments.  Trade, rather than plunder, is also a far greater part of wealth today.  Another option is a shareholder state, one where the incentives of the population are more closely aligned with the ruling class than most forms of government.