Skip to main content

Advertisement

Log in

State capacity, economic freedom, and classical liberalism

  • Original Paper
  • Published:
Constitutional Political Economy Aims and scope Submit manuscript

Abstract

This paper evaluates state capacity from the perspective of classical liberalism, especially the relationship of state capacity to economic freedom. It argues that a revenue-maximizing ruler is incentivized to allow for more economic freedom in the presence of more state capacity for most dimensions of economic freedom, as long as the time horizon for the ruler is non-myopic. In doing so, findings elsewhere concerning the relationship between other liberalizations (such as religious freedom and free trade) and state capacity are generalized. Expansions in state capacity are framed as facilitating efficiency-enhancing tax swaps which allow for more revenue generation and political support at the cost of the same or lower levels of deadweight loss. In the context of these issues, the classical liberal concern of a state using its capacity to repress society, rather than support markets, is also confronted.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

Notes

  1. Defecting from institutional norms in order to raise further revenues will not be “counted” as building state capacity. This may not be fully congruent with the views of critics of state capacity, but a middle course is plotted here.

  2. ; Albrecht et al. (2022), C.f. Leeson, (2020), Thompson and Hickson (2001).

  3. In fact, Koyama (forthcoming) uses Area 2 as his preferred method of assessing legal capacity.

  4. One may take the position that even attempts by the state to play a market-supporting role will have detrimental effects, as in Benson, (1990), Murtazashvili and Murtazashvili, (2015), or Leeson and Harris (2018). The perspective here is that rulers will begin playing this role when doing so is economically equivalent to the efficiency-gaining tax swap.

  5. It is possible that when a society is already close to a situation like a civil war, investments in coercive capacity can be a public bad.

  6. Lindert (2004) can be read in terms of the creation of fiscal capacities facilitating the implementation of methods of taxation which impose less deadweight loss for each unit of revenue taxed.

  7. See also Acemoglu and Robinson, (2012: 66): “Similarly, leaders of African nations that have languished over the last half century under insecure property rights and economic institutions, impoverishing much of their populations, did not allow this to happen because they thought it was good economics; they did so because they could get away with it and enrich themselves at the expense of the rest, or because they thought it was good politics, a way of keeping themselves in power by buying the support of crucial groups or elites” (emphasis added).

  8. C.f. Bonfatti et al., (2020).

  9. Glaeser and Shleifer, (2003) give another complementary account, arguing that regulations for the purpose of protecting the weak from the strong are necessary when capacities are not high enough to prevent the corruption of the legal system by the powerful. When legal capacity is high, something closer to laissez-faire becomes feasible. See also Beher et al., (2021), which is an extension that comes to somewhat different conclusions.

  10. See e.g., Grier and Tullock, (1989), Easterly et al., (1997), Barro, (2003), Bjornskov et al., (2007), Bjornskov and Foss, (2013).

  11. This list is according to scores from Varieties of Democracy on “State Ownership of economy” in 2021.

  12. As one commentator summarizes, “Why are unearned riches such a curse? Because they impede the development of modern political institutions, laws, and bureaucracies. Let us cynically assume that any government’s chief goal is to give itself greater wealth and power. In a country with no resources, for the state to get rich, society has to get rich so that the government can then tax this wealth. In this sense East Asia was blessed that it was dirt poor. Its regime had to work hard to create effective government because that was the only way to enrich the country and thus the state. Governments with treasure in their soil have it too easy: they are ‘trust-fund’ states. They get fat from mineral or oil sales and don’t have to tackle the far more difficult task of creating a framework of laws and institutions that generate national wealth (think of Nigeria, Venezuela, or Saudi Arabia).” (Zakaria, 2003: 75).

  13. The Fragile States Index measures the vulnerability of states. The top two tiers are “Stable” and “Sustainable.” The bottom two tiers are “Warning” and “Alert.” Turkmenistan and Bahrain receive a “Low Warning,” Algeria Laos, and Azerbaijan receive and “Warning,” and Eritrea receives an “Alert.” The Fragile States Index has not been used throughout this paper because it does not map well into the definition of state capacity given in the introduction. However, it does work for this minor point of establishing that these countries do not possess not strong, effective states. The Fragile States Index does not assess that the other countries with the highest degree of government ownership are in particularly strong position either, as Cuba receives “Less Stable,” Rwanda receives “High Warning,” and North Korea and Venezuela receive “Alert” categorizations.

  14. The conscription subcomponent does not follow the same narrative as the other pieces of the labor market regulation subindex. In this context, the practice of conscription is likely best viewed as an inefficient tax whereby labor is provided in-kind in place of a money payment. Conscription should disappear as capacity increases, although conscription remains in place or has even returned to a few Western countries. It is possible states are using conscription as a means of maintaining or growing their social capital stock (Krebs, 2004). While this tactic may seem odd, it isn’t like social science has come to any firm conclusions on how to reliably build a country’s social capital stock.

  15. The main conclusion to the follow-up study to Djankov et al., (2002), Botero et al., (2004), considers labor market regulation rather than business regulation and concludes that the origins of labor market regulations are primarily a result of legal differences. However, Botero et al., (2004: 1343–1344) see their results as broadly consistent with the conclusions from Djankov et al., (2002).

  16. C.f. Posner, (1971).

References

  • Acemoglu, D., & Robinson, J. (2000). Why did the west extend the franchise? Democracy, inequality, and growth in historical perspective. Quarterly Journal of Economics, 115(4), 1167–1199.

    Article  Google Scholar 

  • Acemoglu, D., & Robinson, J. (2012). Why nations fail: The origins of power, prosperity, and poverty. Crown Business.

    Google Scholar 

  • Acemoglu, D., & Robinson, J. (2019). The narrow corridor: States, societies, and the fate of liberty. Viking.

    Google Scholar 

  • Aisen, A., & Veiga, F. J. (2013). How does political instability affect economic growth? European Journal of Political Economy, 29(March), 151–167.

    Article  Google Scholar 

  • Albrecht, B., Hendrickson, J., & Salter, A. (2022). Evolution, uncertainty, and the asymptotic efficiency of policy. Public Choice, 192, 169–188.

    Article  Google Scholar 

  • Alesina, A., Ozler, S., Roubini, N., & Swagel, P. (1996). Political instability and economic growth. Journal of Economic Growth, 1(2), 189–211.

    Article  Google Scholar 

  • Anderson, G. M. P. J., & Boettke. (1997). Soviet venality: A rent-seeking model of the communist state. Public Choice, 93, 37–53.

    Article  Google Scholar 

  • Andrews, M., Pritchett, L., & Woolcock, M. (2017). Building state capability: Evidence, analysis, action. Oxford University Press.

    Book  Google Scholar 

  • Balko, R. (2014). Rise of the warrior cop: The militarization of america’s police forces. Public Affairs.

    Google Scholar 

  • Barro, R. J. (2003). Determinants of economic growth in a panel of countries. Annals of Economics and Finance, 4, 231–274.

    Google Scholar 

  • Behrer, A. P., Glaeser, E., Ponzetto, G. A. M., & Shleifer, A. (2021). Securing property rights. Journal of Political Economy, 129(4), 1157–1192.

    Article  Google Scholar 

  • Benson, B. (1990). The enterprise of law: Justice without the state. Pacific Research Institute for Public Policy.

    Google Scholar 

  • Besley, T. (2007). Principled agents? The political economy of good government. Oxford University Press.

    Book  Google Scholar 

  • Besley, T., & Persson, T. (2009). The origins of state capacity: Property rights, taxation, and politics. American Economic Review, 99(4), 1218–1244.

    Article  Google Scholar 

  • Besley, T., & Persson, T. (2011). Pillars of prosperity: The political economy of development clusters. Princeton University Press.

    Book  Google Scholar 

  • Besley, T., Persson, T., & Dann, C. (2021). “Pillars of prosperity: A ten-year update.” CEPR discussion paper no 1621–1623177166, https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16256

  • Bjornskov, C., & Foss, N. (2013). How strategic entrepreneurship and the institutional context drive economic growth. Strategic Entrepreneurship Journal, 7(1), 50–69.

    Article  Google Scholar 

  • Bjornskov, C., Dreher, A., & Fischer, J. A. V. (2007). The bigger the better? Evidence of the effect of government size on life satisfaction around the world. Public Choice, 130, 267–292.

    Article  Google Scholar 

  • Blake, D. (2013). Thinking ahead: Government time horizons and the legalization of international investment agreements. International Organization, 67(4), 797–827.

    Article  Google Scholar 

  • Bonfatti, R, Brzezinski A, Karaman, K & Palma N P G. 2020. “Monetary capacity.” CPER discussion paper no. 15299.

  • Bosio, E., Djankov, S., Glaeser, E., & Shleifer, A. (2022). Public procurement in law and practice. American Economic Review, 112(4), 1091–1117.

    Article  Google Scholar 

  • Botero, J. C., Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). The regulation of labor. Quarterly Journal of Economics, 119(4), 1339–1382.

    Article  Google Scholar 

  • Bremmer, I. (2006). The J curve: A new way to understand why nations rise and fall. Simon & Schuster.

    Google Scholar 

  • Brennan, G., & Buchanan, J., (2000) [1980]. The power to tax: analytical foundations of a fiscal constitution. Indianapolis: Liberty Fund

  • Buchanan, J. (1975). The limits of liberty: Between anarchy and leviathan. University of Chicago Press.

    Google Scholar 

  • Chuaire, M. F., Scartascini, C., & Tommasi, M. (2017). State capacity and the quality of polities: Revisiting the relationship between openness and government size. Economics and Politics, 29(2), 133–156.

    Article  Google Scholar 

  • Collier, P. (2010). The political economy of natural resources. Social Research, 77(4), 1105–1132.

    Article  Google Scholar 

  • Collier, P., & Hoeffler, A. (2004). Greed and grievance in civil war. Oxford Economic Papers, 56, 563–595.

    Article  Google Scholar 

  • Cowen, T. (2006). “The libertarian vice.” Marginal revolution, https://marginalrevolution.com/marginalrevolution/2006/08/the_libertarian.html

  • Cowen, T. (2020). “What libertarian has become and will becoming—state capacity libertarianism.” Marginal revolution, https://marginalrevolution.com/marginalrevolution/2020/01/what-libertarianism-has-become-and-will-become-state-capacity-libertarianism.html

  • Coyne, C., & Hall, A. (2021). Manufacturing militarism: U.S. government propaganda in the war on terror. Stanford University Press.

    Book  Google Scholar 

  • Demsetz, H. (1967). Toward a theory of property rights. American Economic Review, 57(2), 347–359.

    Google Scholar 

  • Devereaux, A., & Peng, L. (2020). Give us a little social credit: To design or to discover personal ratings in the era of big data. Journal of Institutional Economics, 16(3), 369–387.

    Article  Google Scholar 

  • Djankov, S., La, P. R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117(1), 1–37.

    Article  Google Scholar 

  • Drumm, B. (2015). “Distinguishing earth, water, fire, and air: factor analysis to determine the four fundamental elements of state capability.” Bachelor’s thesis, Harvard College

  • Easterly, W., Montiel, P., & Loayza, N. (1997). Has latin america’s post-reform growth been disappointing? Journal of International Economics, 43(3–4), 287–311.

    Article  Google Scholar 

  • Fukuyama, F. (2014). Political order and political decay: From the industrial revolution to the globalization of democracy. Farrar, Straus and Giroux.

    Google Scholar 

  • Geloso, V., & Salter, A. (2020). State capacity and economic development: Casual mechanism or correlative filter? Journal of Economic Behavior and Organization, 170(February), 372–385.

    Article  Google Scholar 

  • Glaeser, E., & Shleifer, A. (2003). The rise of the regulatory state. Journal of Economic Literature, 41, 401–425.

    Article  Google Scholar 

  • Grier, K., & Tullock, G. (1989). An empirical analysis of cross-national economic growth, 1951–1980. Journal of Monetary Economics, 24(2), 259–276.

    Article  Google Scholar 

  • Gwartney, J., Lawson, R., Hall, J., & Murphy, R. H. (2021). Economic freedom of the world. Fraser Institute.

    Google Scholar 

  • Harford, T. (2020). The data detective: Ten easy rules to make sense of statistics. Riverhead Books.

    Google Scholar 

  • Hellwig, T., & Marinova, D. M. (2015). More misinformed than myopic: Economic retrospections and the voter’s time horizon. Political Behavior, 37(4), 868–887.

    Article  Google Scholar 

  • Hendrix, C. S. (2010). Measuring state capacity: Theoretical and empirical implications for the study of civil conflict. Journal of Peace Research, 47(3), 273–285.

    Article  Google Scholar 

  • Higgs, R. (1987). Crisis and leviathan: Critical episodes in the growth of American government. Oxford University Press.

    Google Scholar 

  • Johnson, N., & Koyama, M. (2014). Tax farming and the origins of state capacity in England and France. Explorations in Economic History, 51(January), 1–20.

    Article  Google Scholar 

  • Johnson, N., & Koyama, M. (2019). Persecution and toleration: The long road to religious freedom. Cambridge University Press.

    Book  Google Scholar 

  • Jong-A-Pin, R. (2009). On the measurement of political instability and its impact on economic growth. European Journal of Political Economy, 25(1), 15–29.

    Article  Google Scholar 

  • Keefer, P., & Knack, S. (2007). Boondoggles, rent-seeking, and political checks and balances: Public investment under unaccountable governments. Review of Economics and Statistics, 89(3), 566–572.

    Article  Google Scholar 

  • Koyama, M. (forthcoming). Legal capacity. In J. Jenkins & J. Rubin (Eds.), The oxford handbook of historical political economy. Oxford University Press.

  • Krebs, R. (2004). A school for the nation? How military service does not build nations, and how it might. International Security, 28(4), 85–124.

    Article  Google Scholar 

  • Lee, M., & Zhang, N. (2017). Legibility and the informational foundations of state capacity. Journal of Politics, 79(1), 118–132.

    Article  Google Scholar 

  • Leeson, P. T. (2020). Logic is a harsh mistress: Welfare economics for economists. Journal of Institutional Economics, 16(2), 145–150.

    Article  Google Scholar 

  • Leeson, P. T., & Harris, C. (2018). Wealth-destroying private property rights. World Development, 107, 1–9.

    Article  Google Scholar 

  • Li, W., Roland, G., & Xie, Y. (2022). Erosion of state power, corruption control, and fiscal capacity. The Economic Journal, 132(644), 1542–1565.

    Article  Google Scholar 

  • Lindert, P. H. (2004). Growing public: Social spending and economic growth since the eighteenth century. Cambridge University Press.

    Book  Google Scholar 

  • Link, P. (2011). “China: From famine to Oslo.” The New York Review of Books, https://www.nybooks.com/articles/2011/01/13/china-famine-oslo/

  • McChesney, F. S. (1987). Rent extraction and rent creation in the economic theory of regulation. Journal of Legal Studies, 16(1), 101–118.

    Article  Google Scholar 

  • Meltzer, A., & Richard, S. (1981). A rational theory of the size of government. Journal of Political Economy, 89(5), 914–927.

    Article  Google Scholar 

  • Merridale, C. (1996). The 1937 census and the limits of stalinist rule. Historical Journal, 39(1), 225–240.

    Article  Google Scholar 

  • Murphy, R. H. (2022). On whether the size of government belongs in economic freedom indices. Econ Journal Watch, 19(1), 47–57.

    Google Scholar 

  • Murphy, R. H., & O’Reilley, C. (2022). “Freedom through taxation: the effect of fiscal capacity on the rule of law.” Working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4111626

  • Murtazashvili, I., & Murtazashvili, J. (2015). Anarchy, self-governance, and legal titling. Public Choice, 162(3–4), 287–305.

    Article  Google Scholar 

  • Murtazashvili, J., & Murtazashvili, I. (2020). Wealth-destroying states. Public Choice, 182, 353–371.

    Article  Google Scholar 

  • North, D., Wallis, J. J., & Weingast, B. (2009). Violence and social orders: a conceptual framework for interpreting recorded human history. Cambridge University Press.

    Book  Google Scholar 

  • Olson, M. (1993). Dictatorship, democracy, and development. American Political Science Review, 87(3), 567–576.

    Article  Google Scholar 

  • Pavlik, J. B., & Young, A. T. (2020). Medieval European traditions in representation and state capacity today. Economics of Governance, 21, 133–186.

    Article  Google Scholar 

  • Posner, R. A. (1971). Taxation by regulation. The Bell Journal of Economics and Management Science, 2(1), 22–50.

    Article  Google Scholar 

  • Queralt, D. (2015). From mercantilism to free trade: A history of fiscal capacity building. Quarterly Journal of Political Science, 10(2), 221–273.

    Article  Google Scholar 

  • Rajagopalan, S., & Tabarrok, A. (2021). Simple rules for the developing world. European Journal of Law and Economics, 52, 341–362.

    Article  Google Scholar 

  • Reynolds, G., & White, P. (2021). The new due process: Fairness in a fee-driven state. Tennessee Law Review, 88, 1025.

    Google Scholar 

  • Rodrik, D. (1999). Where did all the growth go? External shocks, social conflict, and growth collapses. Journal of Economic Growth, 4(4), 385–412.

    Article  Google Scholar 

  • Rothbard, M. (2002). Milton Friedman unraveled. Journal of Libertarian Studies, 16(4), 37–54.

    Google Scholar 

  • Salter, A. (2015). Rights to the realm: Reconsidering western political development. American Political Science Review, 109(4), 725–734.

    Article  Google Scholar 

  • Salter, A., & Hall, A. (2015). Calculating bandits: Quasi-corporate governance and institutional selection in autocracies. Advances in Austrian Economics, 19, 193–213.

    Article  Google Scholar 

  • Savoia, A., & Sen, K. (2015). Measurement, evolution, determinants, and consequences of state capacity: A review of recent research. Journal of Economic Surveys, 29(3), 441–458.

    Article  Google Scholar 

  • Scheidel, W. (2017). The great leveler: Violence and the history of inequality from the stone age to the twenty-first century. Princeton University Press.

    Book  Google Scholar 

  • Scott, J. C. (1998). Seeing like a state: How certain schemes to improve the human condition have failed. Yale University Press.

    Google Scholar 

  • Solar, C. (2015). Police bribery: Is corruption fostering dissatisfaction with the political system? Democracy and Security, 11, 374–394.

    Article  Google Scholar 

  • Somin, I. (2015). The grasping hand: Kelo v. city of New London and the limits of eminent domain. University of Chicago Press.

    Book  Google Scholar 

  • Taylor, C. (2007). A Secular Age. Cambridge, MA.

    Book  Google Scholar 

  • Thompson, E. A., & Hickson, C. R. (2001). Ideology and the evolution of vital institutions: guilds, the gold standard, and modern international cooperation. Kluwer Academic Publishers.

    Book  Google Scholar 

  • Tooze, A. (2001). Statistics and the German state, 1900–1945. Cambridge University Press.

    Google Scholar 

  • Tooze, A. (2006). The wages of destruction: The making and breaking of the Nazi economy. Penguin.

    Google Scholar 

  • Wisman, J. D. (2014). 9/11, Foreign threats, political legitimacy, and democratic institutions. Humanomics, 30(1), 22–40.

    Article  Google Scholar 

  • Zakaria, F. (2003). The future of freedom: Illiberal democracy at home and abroad. W. W. Norton & Company.

    Google Scholar 

Download references

Acknowledgements

The author thanks Robert Lawson, Colin O’Reilly, and Mark Koyama for their helpful comments. Any remaining errors are solely my own.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Ryan H. Murphy.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Murphy, R.H. State capacity, economic freedom, and classical liberalism. Const Polit Econ 34, 165–187 (2023). https://doi.org/10.1007/s10602-022-09374-w

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10602-022-09374-w

Keywords

JEL Classification

Navigation