1. What is the State and why does it exist?
A bleak but useful starting point is Max Weber’s view that a social organization is "a
'state' if and insofar as its administrative staff successfully upholds a claim on the
monopoly of the legitimate use of violence in the enforcement of its order" (Weber, Max.
The Theory of Social and Economic Organization (1964), p. 154). This definition seems
to find consonance with the operation of many of the most obvious instruments used by
the state. The police, courts, military, and tax authorities are each granted the resources to
create a credible threat of violence.
One apparent problem with this view is that it seems too limited to account for the
modern state. While all modern states make use of force to create internal order and to
defend against external threats, they do much more. In fact, when the spending patterns
of governments are examined (figure 1.1), it is clear that Public Order and Defense are
only a small part of what the modern state does. The reason that this is not a serious
problem for Weber’s view of the state is that these myriad activities of the state are
largely financed by taxation or by bonds (which are guaranteed by future taxation - figure
1.2). Taxes are not voluntary contributions. They are assessed and imposed by a state that
has the power to force compliance.
Another possible problem with Weber’s characterization of the state might be that the
state is not unique in using violence. In many modern societies parents are granted the
right to use moderate force to discipline their children, families and firms are granted a
limited right to use force in the defense of their property, and private security firms are
often granted similar rights in the defense of the property of their customers. A critical
point to notice is that this right to the use of violence is granted by the state, and as such
the state maintains its legitimizing monopoly on violence.
If this definition of the state is accepted, the definition raises a rather important
question, why do such institutions exist at all? There must be some advantage that
societies gain by having a state; otherwise the obvious disadvantage of having an
institution with a monopoly on violence would make such an institution both undesirable
and unlikely.
In 1651 Thomas Hobbes created a huge controversy with his new book ‘Leviathan’.
In it he argued that the natural condition of each person in a stateless society was to be at
constant war with his neighbors.
“So that in the nature of man, we find three principal causes of discord. First –
competition (over scarce resources), secondly - distrust, thirdly - glory. The first
makes men invade for gain; the second for safety (by striking first); and the third
for reputation. The first use violence to make themselves masters of other men’s
persons, wives, children, and cattle; the second use it to defend themselves and
their families and property; the third use it for trifles - a word, a smile, a different
opinion, and any other sign of a low regard for them personally, if not directly then
obliquely through a disrespectful attitude to their family, their friends, their nation,
their profession, or their name.
This makes it obvious that for as long as men live without a common power to
keep them all in awe, they are in the condition known as ‘war’; and it is a war of
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every man against every man. For WAR doesn’t consist just in battle or the act of
fighting, but in a period of time during which it is well enough known that people
are willing to join in battle. So the temporal element in the notion of ‘when there is
war’ is like the temporal element in ‘when there is bad weather’. What constitutes
bad weather isn’t a rain-shower or two but an inclination to rain through many
days together; similarly, what constitutes war isn’t actual fighting but a known
disposition to fight during a time when there is no assurance to the contrary. All
other time is PEACE.
Therefore, whatever results from a time of war, when every man is enemy to
every man, also results from a time when men live with no security except what
their own strength and ingenuity provide them with. In such conditions there is no
place for hard work, because there is no assurance that it will yield results; and
consequently no cultivation of the earth, no navigation or use of materials that can
be imported by sea, no construction of large buildings, no machines for moving
things that require much force, no knowledge of the face of the earth, no account
of time, no practical skills, no literature or scholarship, no society; and - worst of
all - continual fear and danger of violent death, and the life of man solitary, poor,
nasty, brutish, and short.”
Thomas Hobbes (1651), Leviathan, or the Matter, Forme, and Power of a
Commonwealth, Ecclesiasticall and Civil, p. 52 at
http://www.earlymoderntexts.com/pdfbig/hobbebig.pdf
To obtain a state of peace in which prosperity might be possible, Hobbes argued that
individuals would find it in their interest to contract a sovereign power to provide a
monopoly on the legitimate use of violence to enforce a peaceful order. For Hobbes, the
state was what emerged from out of this social contract and by his view, order and
prosperity were neither spontaneous nor natural. The very visible guiding hand of the
sovereign power was essential to peace and prosperity. An obvious implication of this
analysis is that societies without a state will fail to enjoy peace and prosperity, and hence
are unlikely to be found.
Hobbes’ claim that a sovereign authority needs to be granted coercive power to
enforce peace requires justification. Why is it so difficult to get peace without a sovereign
authority? If peace is a benefit to everyone in a group, will individuals act to undermine
peace? Clearly Hobbes thought so, but not everyone has been convinced by Hobbes’s
argument.
Unlike Hobbes, we have the advantage of economic reasoning to explore why a
spontaneous order is difficult to establish, and why a sovereign authority can tip the
balance towards social peace. To see why, consider the following simple game.
Suppose that there are two people in the society and that each person enjoys an
income of 5 utils from his land. If one player chooses to invest 2 utils in the tools of war
while the other player chooses to make no investment in war tools, the player with the
war tools will be able to seize the other player’s utils without any resistance. Resistance
would only lead to certain death or injury. The result is that the player who invests in war
enjoys a net income of 8 utils (=5+5-2), while the peaceful neighbor will be left with
nothing (0 utils). If both individuals choose to invest 2 utils in a war against the other,
neither side is likely to risk death or injury by actually fighting. The result is a stalemate,
leaving each player with 3 utils from their mutual preparation for war.
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We can set this game up using a simple 2x2 matrix known as a normal form game.
Each player in the matrix has two strategies (war or peace). Each cell in the matrix gives
an ordered pair that identifies payoff to each player for each possible combination of
strategies that the players of the game might take. The first element of the ordered pair is
player 1’s payoff, while the second element is player 2’s payoff. The information given in
the preceding paragraph is summarized in the normal form game illustrated in figure 1.1.
Figure 1.1
Player 2
War
War
Peace
(3,3)
(8,0)
(0,8)
(5,5)
Player 1
Peace
It is quite clear that the collectively rational decision is for both parties to choose
peace as the total social payoff (10) is maximized. Unfortunately, it is not privately
rational to choose peace. Suppose that player 2 chooses peace. If player 1 chooses peace,
then his payoff is 5, while a choice of war nets him 8. Suppose that player 2 chooses war.
If player 1 chooses peace, then his payoff is 0, while a choice of war nets him 3. In both
instances war pays more than peace. War is the dominant strategy for player 1 as it
always is the best strategy, no matter what player 2 chooses. Similarly, it can easily be
shown that war is the dominant strategy for player 2. The result is that both players will
tend to choose War.
Another way of looking at the game is to ask whether there is any incentive to deviate
from a given combination of strategies. It can be easily shown that at least one player has
an incentive to deviate from all combinations of strategies except for the war-war
combination of strategies. For this reason, only the war-war combination of strategies is a
Nash Equilibrium of this game.
Suppose that a third party offers to provide protection for a fee of 1 util. If the
sovereign collects 1 util from each player, she will have 2 utils and can use these utils to
stalemate either player who chooses war. If a player chooses peace they earn 5-1=4 utils
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whether or not the other player chooses war. If a player chooses to invest 2 utils into war,
the player cannot win as they will be stalemated by the sovereign power, leaving them
with only 2 utils, no matter what the other player does. The resulting game is illustrated
in figure 1.2. As is clear, the strategy combination of Peace-Peace is the unique Nash
Equilibrium of this game.
Figure 1.2
Player 2
War
War
Player 1
Peace
Peace
(2,2)
(2,4)
(4,2)
(4,4)
Objections can and should be raised about the generality of this game as a model of
the desirability of the social contract. For instance, the cost of the war was arbitrarily
chosen to be 2. Clearly in a state of nature it would be more realistic to give people the
choice of how much to invest in war and defense. At the end of this chapter, this
possibility is explored in a problem. Another weakness of this game is that it arbitrarily
assumes the taxing choices that a sovereign will make and ignores the possibility that a
sovereign might choose to tax differently or might even choose not to act on her duty to
protect and provide order. Despite these weaknesses, the game does provide an economic
explanation of what might be the root of the social problem that sovereign power is
aimed at addressing.
The nature of the explanation is unusual. It involves an economic model in which the
pursuit of individual interests affects collective interests. The model is by no means an
accurate representation of the problem that Hobbes identified; nonetheless it stands as a
powerful parable about the social world we inhabit. The critical element of the parable is
the importance that private incentive can play in causing individuals to deviate from
collectively rational behavior.
To see how this parable can have broader resonance with social reality, consider the
case of the cold war. In the second half of the 20th Century, the Soviet Union and its allies
entered into an arms race with the NATO Alliance. Both sides invested heavily in the
tools of war. Use of these tools by either side would lead to retaliation by the other side,
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and given the power of the atomic weapons at each side’s disposal, the result was
“mutually assured destruction”. Both sides were incapable to stop themselves from
investing in tools of war that they dare not use – a wasteful social outcome if there ever
was one. The logic of this conflict rested on the fact that private incentives were at odds
with the collectively rational choice to not invest in weapons that could not be used. The
heart of the problem was that if one side chose not to invest, the other side would be
tempted to invest and force the other side to capitulate. Promises by their opponents not
to invest in the tools of war, were not credible because the private incentive was so strong
to cheat on agreements and to take advantage of any peaceful initiative to disarm.
As the model tells us, it helps to have a sovereign power to alter the incentives and
change the equilibrium of the game to provide peace and prosperity. The institution
invented to serve this task was the United Nations. Unfortunately, the United Nations
ability to act as a sovereign power was compromised by the fact that it had no useful
sanction (i.e. credible threat of violence) that it could use against the players in this tragic
game. If it could not change the payoffs from the game, it could not change the
equilibrium outcome. The cold war had a logic that is very much like the logic of the
game that we have just examined.
As we continue in this text, we will develop a large number of economic models like
the above model. These models will tend to be highly abstract, and will often be
constructed in very different ways. The one thing they will all have in common is they
each examine the main forces affecting the social equilibrium, and the role that the state
plays in altering this equilibrium. As you develop your facility with these models, you
will also begin to think like an economist, quickly seeing how social reality can be recast
into a simple abstract model that can tell profound stories about the world.
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Glossary:
Dominant Strategy
Nash Equilibrium
Social Contract
State: “A social organization is a state if and insofar as its administrative staff
successfully upholds a claim on the monopoly of the legitimate use of violence in the
enforcement of its order"
References:
Thomas Hobbes (1651), Leviathan, or the Matter, Forme, and Power of a
Commonwealth, Ecclesiasticall and Civil, p. 52 at
http://www.earlymoderntexts.com/pdfbig/hobbebig.pdf
Max Weber (1964), The Theory of Social and Economic Organization
Problems:
1. Consider the game illustrated in figure 4.1. Suppose that each player can now choose
to invest between 0 and 5 utils into providing the tools for war. If we continue to assume
that the player with the larger investment will win a conflict and that equal investments
will lead to a stalemate, what will be the Nash equilibrium of this new game?
2. Return to the assumption that each player can choose to invest either 0 utils or 2 utils
into providing the tools for war. Now assume that a sovereign power exists that can
choose the level of taxation. What will be the Nash Equilibrium of this 3 player game?
3. With the fall of the Roman Empire, Western Europe entered into the medieval period
in which power became decentralized, and the economy reoriented itself into a rural self
sufficiency. Pushing this change was the increasing danger to travelers and traders in the
absence of Rome’s authority. Much of the trade and manufacture for export that had
existed in the more urban Roman economy, simply disappeared. The decline of Rome’s
authority also lead to the rise to power of a patchwork of local powerful families who
found themselves in frequent armed conflict with neighboring powerful families. Suggest
how these powerful families might improve their welfare.
4. During the late medieval period, nation states began to grow in size and power. Why?
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