Violent Orders
What do all governments have in common? Some are ruthless dictatorships, and some are benign democracies. Some are large, and control the majority of the economy and some are small, leaving businesses alone to do what they like. Douglas North defines government as “an organization with a comparative advantage in violence, extending over a geographic area whose boundaries are determined by its power to tax constituents” (North 1981:21). Any organization with a comparative advantage in violence is a government and all governments must have a comparative advantage in violence - they must be the best at using force in their territory.
North tells a parable (that might be true) of how governments came about. In the olden days, when hunter gatherer bands were the norm, there were no governments other than tribal chieftains who looked out for the best interests of their tribe because many of the members of their tribe were related to them. Evolution and genetic interests led them to be benevolent, lest they wipe out their own lineage. During the first agricultural revolution, people transitioned from small groups to larger ones, and they had to increasingly deal with strangers. Because the harvest was concentrated at a few specific times of the year, instead of gathering just enough to survive each day, there is a surplus production that can be captured by those specializing in violence. There is an eternal struggle between roving bandits, who go from farm to farm taking what they can and moving on, to stationary bandits. For example, the Normans started out as roving bandits, taking food and goods from people in France, but eventually the French nobility offered them a plot of land to convince them to stop attacking. Roving bandits have an incentive to destroy and steal, and not invest anything in the people or the land. Stationary bandits, on the other hand, can invest in the land, increasing the amount they can take every year. A smaller percentage of a larger amount can be more valuable then the entire output of a poorer country. Similarly, a higher tax rate may increase the burden on society so much that it reduces the total tax revenue. Depending on the relative rates of return to productive investment vs. putting more effort into taxing existing activity, governments will focus on one or the other.
Governments which do not maintain a strong comparative advantage in violence must compromise to the wills of those who are competitors to violent activity. For example, when the barons of England had significant military power, they forced King John to accept limits on what he could do. In modern democracies, government is significantly constrained on its ability to capture rents since people have significant violent power in relation to their governments. Culture and norms play a huge role in preserving democracy. Although it was true when America was founded that violent capacity was spread thinly, our modern government could easily kill the vast majority of Americans if there were an open rebellion. Still, on the margin, no one leader can seriously move toward converting America to a dictatorship because of the cultural norms against such action.
Government then is a dangerous force in society. Like fire, it is a useful tool, but a dangerous one. There are certain critical tasks that only government can undertake. First and foremost, a government must be able to defend its' territory from other bandits. A government that can not win wars will be defeated and another government will gain its tax revenue. Governments need to collect tax revenue to invest in violent capacity. Taxes are just a way of earning revenue without giving anything in exchange. Although taxation may seem immoral, the economist should ask itself "what are the alternatives?" Without a stationary bandit to protect the country, it becomes prey of roving bandits. Without small scale law enforcement, a person may be subject to burglary and assault. As unpleasant as it is to file taxes, it is worse to have your house broken into or be attacked on the street for your money. Whether a government is better than anarchy is not something that can be determined without the individual facts of the case.
Since governments have comparative advantage in violence, they are the ultimate final judge between two parties in their jurisdiction. The government is in a good position to enforce contracts, since if one party breaks the contract, the government can use coercion to force them to comply with their prior agreement. Similarly, governments have an advantage in defining and enforcing property rights. Once the government decides that one person owns something, they can use force to make sure that person retains control of the property until they write a contract divesting themselves of it. For example, suppose you buy a house and let the government know that you bought it. In exchange for paying property taxes, the government does not let anyone take the house from you until you sell it. Private parties may not have the firepower to fight off those who would steal your house. Although government can fight off other claimants to property, it is an ever present temptation for them to steal your for themselves. The United States has a Contitutional protection against government taking property without due process or just compensation. The advantage for a government to restrict itself in this manner is that if people are secure in their belongings and investments, they will tend to work harder and invest more. Over time, a government that protects property will collect more taxes than one that takes as much as it can right away.
As an extension of property rights enforcement, the government frequently is used to solve externality problems. An externality is an action that affects people other than those who engage in it. For market transactions, an externality affects people other than the buyer and the seller. Goods that have positive externalities - those that help people outside those who produce and purchase them - tend to be underproduced and vice versa. Pollution is the classic negative externality. Suppose a factory making widgets also produces pollution that affects everyone in a nearby town. Even people who don't buy widgets suffer from the pollution, so a government could step in to reduce the pollution. This would effectively be defining property rights to the air. What right does each party have to use the scarce public resource? Positive externalities, such as scientific advancement can be subsidized by the government to encourage them. Public goods are those which are non-excludible and non-rival. Non-excludability means you can not prevent someone from using something - not too useful if you want to get them to pay for it. Non-rival means that if one person uses it, it does not affect another persons use of it. For example, digital music (or anything that can be reduced to 1s and 0s for that matter) is non-rival. Markets have trouble dealing with public goods, and so governments can be a superior institution for providing them.
Although a government can address many problems other institutions have trouble dealing with, its inseparability from violence makes it a dangerous tool. If all you have is a hammer, all problems look like nails. If all you have is a gun, violence seems like a good solution to many problems. Governments may frequently try to monopolize markets in order to make it easier to extract rents. Keeping out competitors is easy if you can arrest those who compete with you. Lack of competition though leads to higher prices and lower amounts of innovation. When deciding whether government or private markets should produce something, as yourself does it make sense to bundle a military with those services? Services that do not gain from adding violent capacity to them are better left to private firms. Additionally, many consider that unnecessary use of violence is inherently wrong and so keeping as many transactions as possible within the scope of voluntary orders is morally right.
Governments are inseparable from violence. Nearly everything they do involves either implicit or explicit coercion. Coercion is a useful tool for people to have, but can be dangerous.
North tells a parable (that might be true) of how governments came about. In the olden days, when hunter gatherer bands were the norm, there were no governments other than tribal chieftains who looked out for the best interests of their tribe because many of the members of their tribe were related to them. Evolution and genetic interests led them to be benevolent, lest they wipe out their own lineage. During the first agricultural revolution, people transitioned from small groups to larger ones, and they had to increasingly deal with strangers. Because the harvest was concentrated at a few specific times of the year, instead of gathering just enough to survive each day, there is a surplus production that can be captured by those specializing in violence. There is an eternal struggle between roving bandits, who go from farm to farm taking what they can and moving on, to stationary bandits. For example, the Normans started out as roving bandits, taking food and goods from people in France, but eventually the French nobility offered them a plot of land to convince them to stop attacking. Roving bandits have an incentive to destroy and steal, and not invest anything in the people or the land. Stationary bandits, on the other hand, can invest in the land, increasing the amount they can take every year. A smaller percentage of a larger amount can be more valuable then the entire output of a poorer country. Similarly, a higher tax rate may increase the burden on society so much that it reduces the total tax revenue. Depending on the relative rates of return to productive investment vs. putting more effort into taxing existing activity, governments will focus on one or the other.
Governments which do not maintain a strong comparative advantage in violence must compromise to the wills of those who are competitors to violent activity. For example, when the barons of England had significant military power, they forced King John to accept limits on what he could do. In modern democracies, government is significantly constrained on its ability to capture rents since people have significant violent power in relation to their governments. Culture and norms play a huge role in preserving democracy. Although it was true when America was founded that violent capacity was spread thinly, our modern government could easily kill the vast majority of Americans if there were an open rebellion. Still, on the margin, no one leader can seriously move toward converting America to a dictatorship because of the cultural norms against such action.
Government then is a dangerous force in society. Like fire, it is a useful tool, but a dangerous one. There are certain critical tasks that only government can undertake. First and foremost, a government must be able to defend its' territory from other bandits. A government that can not win wars will be defeated and another government will gain its tax revenue. Governments need to collect tax revenue to invest in violent capacity. Taxes are just a way of earning revenue without giving anything in exchange. Although taxation may seem immoral, the economist should ask itself "what are the alternatives?" Without a stationary bandit to protect the country, it becomes prey of roving bandits. Without small scale law enforcement, a person may be subject to burglary and assault. As unpleasant as it is to file taxes, it is worse to have your house broken into or be attacked on the street for your money. Whether a government is better than anarchy is not something that can be determined without the individual facts of the case.
Since governments have comparative advantage in violence, they are the ultimate final judge between two parties in their jurisdiction. The government is in a good position to enforce contracts, since if one party breaks the contract, the government can use coercion to force them to comply with their prior agreement. Similarly, governments have an advantage in defining and enforcing property rights. Once the government decides that one person owns something, they can use force to make sure that person retains control of the property until they write a contract divesting themselves of it. For example, suppose you buy a house and let the government know that you bought it. In exchange for paying property taxes, the government does not let anyone take the house from you until you sell it. Private parties may not have the firepower to fight off those who would steal your house. Although government can fight off other claimants to property, it is an ever present temptation for them to steal your for themselves. The United States has a Contitutional protection against government taking property without due process or just compensation. The advantage for a government to restrict itself in this manner is that if people are secure in their belongings and investments, they will tend to work harder and invest more. Over time, a government that protects property will collect more taxes than one that takes as much as it can right away.
As an extension of property rights enforcement, the government frequently is used to solve externality problems. An externality is an action that affects people other than those who engage in it. For market transactions, an externality affects people other than the buyer and the seller. Goods that have positive externalities - those that help people outside those who produce and purchase them - tend to be underproduced and vice versa. Pollution is the classic negative externality. Suppose a factory making widgets also produces pollution that affects everyone in a nearby town. Even people who don't buy widgets suffer from the pollution, so a government could step in to reduce the pollution. This would effectively be defining property rights to the air. What right does each party have to use the scarce public resource? Positive externalities, such as scientific advancement can be subsidized by the government to encourage them. Public goods are those which are non-excludible and non-rival. Non-excludability means you can not prevent someone from using something - not too useful if you want to get them to pay for it. Non-rival means that if one person uses it, it does not affect another persons use of it. For example, digital music (or anything that can be reduced to 1s and 0s for that matter) is non-rival. Markets have trouble dealing with public goods, and so governments can be a superior institution for providing them.
Although a government can address many problems other institutions have trouble dealing with, its inseparability from violence makes it a dangerous tool. If all you have is a hammer, all problems look like nails. If all you have is a gun, violence seems like a good solution to many problems. Governments may frequently try to monopolize markets in order to make it easier to extract rents. Keeping out competitors is easy if you can arrest those who compete with you. Lack of competition though leads to higher prices and lower amounts of innovation. When deciding whether government or private markets should produce something, as yourself does it make sense to bundle a military with those services? Services that do not gain from adding violent capacity to them are better left to private firms. Additionally, many consider that unnecessary use of violence is inherently wrong and so keeping as many transactions as possible within the scope of voluntary orders is morally right.
Governments are inseparable from violence. Nearly everything they do involves either implicit or explicit coercion. Coercion is a useful tool for people to have, but can be dangerous.