1. What is the State and why does it exist?

A bleak but useful starting point is Max Weber’s view that a social organizationis "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 manymodern 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, andcattle; the second use it to defend themselves and their families and property; the third use it fortrifles - a word, a smile, a different opinion, and any other sign of a low regard for thempersonally, if not directly then obliquely through a disrespectful attitude to their family, theirfriends, their nation, their profession, or their name.

This makes it obvious that for as long as men live without a common power to keep themall in awe, they are in the condition known as ‘war’; and it is a war of every man against everyman. For WAR doesn’t consist just in battle or the act of fighting, but in a period of time duringwhich it is well enough known that people are willing to join in battle. So the temporal element inthe 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 manydays together; similarly, what constitutes war isn’t actual fighting but a known disposition to fightduring 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 andingenuity provide them with. In such conditions there isno place for hard work, because there is no assurance that it will yield results; andconsequently no cultivation of the earth, no navigation or use of materials that can beimported by sea, no construction of large buildings, no machines for moving things thatrequire much force, no knowledge of the face of the earth, no account of time, nopractical skills, no literature or scholarship, no society; and - worst of all - continual fearand 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

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 thelegitimate 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 playerwith 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 enjoysa 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.

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

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 oneplayer 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 1util 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 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

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, 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.

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

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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