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From: carnes@gargoyle.UUCP (Richard Carnes)
Newsgroups: net.politics.theory
Subject: Role of the state in the economy
Message-ID: <205@gargoyle.UUCP>
Date: Thu, 3-Oct-85 18:18:54 EDT
Article-I.D.: gargoyle.205
Posted: Thu Oct  3 18:18:54 1985
Date-Received: Fri, 4-Oct-85 06:52:57 EDT
References: <1674@dciem.UUCP> <28200103@inmet.UUCP> <1351@teddy.UUCP>
Reply-To: carnes@gargoyle.UUCP (Richard Carnes)
Organization: U. of Chicago, Computer Science Dept.
Lines: 60

[Kolodney]
>>The entire economy, without which the concept of wealth would be
>>meaningless, is based on a governmentally created and controlled
>>system of commerce. 
>
>[nrh]
>Governmentally Created?  I find that MOST difficult to believe.  What
>records do you have to substantiate that government created commerce,
>rather than distorting what was there?  In particular, the use of 
>non-government-created money (such as gold)  predates official money,
>with (so far as I know) the first government inflation being that of 
>ancient Rome.  
>
>Government "controlled"?  Why yes, that's quite true, but it doesn't
>explain why the Chinese starvation dropped when their government 
>began allowing folks to sell crops privately.  In short, you've confused
>"controlled", with "aided".  

I agree that governments have been the source of a huge amount of
economic decline in the past and present.  However, it is also true
that government, or the state, is essential for economic growth.  By
"the state" I mean here an organization that has a comparative
advantage in violence and which extends over a geographic area
determined by its power to tax.  Its comparative advantage in
violence enables it to specify and enforce property rights.  (This
bears on the space colony Anarchia:  assuming it can come into
existence in the first place, how would property rights be specified
and enforced, except by such an organization?)

The creation of the state in antiquity was the necessary condition
for all subsequent economic development.  What the state does is to
provide the basic rules of the game, almost any set of which is
better than no rules.  The rules have two objectives:

1.  To provide a structure of property rights which specify the
fundamental rules of competition and cooperation, in order to
maximize the income of the ruler; in other words, to specify the
ownership structure in factor and product markets.

2.  Within this framework, to reduce transaction costs in order to
maximize the output of society and thus increase tax revenues.  The
state does this by providing a set of goods and services (protection
and justice) that lower the cost of specifying, negotiating, and
enforcing the contracts which are basic to economic exchange.  The
economies of scale provided by systems of law, justice, and defense
are basic to civilization.  Individuals who have been given a choice
between a state, however exploitative, and anarchy, have, throughout
history, chosen the state.  Libertarians need to be able to give a
satisfactory explanation for this uncooperative fact.  

Note that there is a potential conflict between the first objective,
designed to maximize the ruler's (or ruling class's) own income, and
the second, designed to maximize the society's output.  This may be
the root cause of the failure of societies to achieve indefinitely
sustained economic growth, although ancient Egypt, Greece, and Rome,
as well as modern societies, all experienced lengthy periods of
economic growth.  This was made possible by the state's provision of
a framework for economizing on the use of resources.  
-- 
Richard Carnes, ihnp4!gargoyle!carnes