Stationary Bandits and the Law

Mancur Olson on State Formation, Democratization, and Rule of Law

The name of this blog comes from a famous Mancur Olson Paper, Dictatorship, Democracy, and Development. In that paper Olson tries to explain where states came from, why dictatorships are so prevalent, and why democracies have better economic performance. As my naming choice would suggest, his ideas have had a big influence on me. In this post I’m going to go over what I like and don’t like in that famous paper. The nutshell version is that I love the theory of state formation, but I can’t make sense of his claims about democracy and rule of law.

Kings Arise When Voluntary Arrangements Can’t Keep You Safe

Olson is perhaps most famous for his work on the provision of public goods. That is the core topic of his influential book The Logic of Collective Action. One of the big insights of that book is that as group size increases it becomes harder to provide public goods. In bigger groups you enjoy less of the fruits of your labor in public goods provision, so you do less of it. Someone might reasonably clean up the village square on their own, but no one spends their Saturday trying to clean up Times Square.

One of the highest value public goods for any society is defense from external threats. Olson’s theory of collective action would suggest that, as with any other public good, smaller groups are better able to make voluntary arrangements to provide this for themselves. As group size increases though, defense might become under-provided and groups might grow in vulnerability. Olson thinks that this happened during the agricultural revolution and led to a massive change in human political behavior.

Olson notes that anthropological evidence seems to show that hunter gatherer groups rarely exceed one hundred people. If they get larger they tend to split to get back down to something between 50-100 people. Groups of this size are small enough that they don’t face serious problems of collective action. Olson points out that this seems to be reflected in the fact that strong political authority is almost unknown in hunter gatherer groups. Decisions are mostly made by consensus and there are rarely strong chiefs.

The agricultural revolution disturbed this balance though. Settled populations grew to become many times the size of hunter gatherer bands. These populations became much too large for voluntary public goods provision, even for something as important as public defense. Olson hypothesizes that these large permanent settlements must have started their history in a very precarious position. They would be under-defended and constantly subject to the predation of roving bandits. The constant pillaging would mean that these populations would have little incentive to invest in productive capacities and would thus be very poor.

In a world of poor settlements facing constant predation, there is a lucrative “trade” to be “offered” by a successful violent entrepreneur. If someone has the capacity to conquer and defend such a settlement, they might be able to make themselves and their new subjects better off. If the conqueror is patient, they can guarantee the subjects safety and the subjects will produce more than they ever would have when they were vulnerable to pillaging. The conqueror can make more by taxing a well protected-population than he could be pillaging them. He just needs to leave them with enough of the surplus that they have sufficient reason to keep investing in higher production

This, in a nutshell, is Olson’s hypothesis about where states came from. Groups got too big to make voluntary arrangements to provide for their own safety and various armed gangs took the opportunity to conquer them to turn them into tax farms. There’s a lot to love in this theory. Not only does it explain where kings come from, it also explains why they are stable. The king as stationary bandit is a nasty thing; he takes a monopolist’s cut from all your production. However, he is much better than the roving bandits who have no qualms about taking everything you have and killing you. This captures Hobbes’s basic understanding that kings are valuable to people in a state of nature. But it comes with the important corrective that the king himself is just another bandit. Despite the heroic stories his scribes will write, the people probably did not ask for him.

What Makes Kingdoms Poorer Than Democracies?

The model of a king who provides public goods and taxes at a rate that leaves plenty of incentive to invest can be too optimistic. A king will only provide public goods to the extent that he expects long term tax increases sufficient to justify the investment. Similarly, he confiscates up to the point where a dollar taken now causes a dollar fall in long term expected revenues. The problem with both of those realities is that their implementation depends on the king’s time horizon. If the long term becomes short for the king, he will stop investing and confiscate with abandon. A king with an insecure hold on power, without an heir, or who just doesn’t care about his heirs, will functionally turn back into a roving bandit.

The king with a short time horizon is a grave problem for monarchies, but so is the mere possibility that the king will eventually have a shorter time horizon. The peasants in a kingdom know that the king might eventually stop caring about the future and repudiate his debts and other contracts and confiscate the wealth of his domain. They know their risk of confiscation in the long run is quite high, so there is always a ceiling on how much they will be willing to invest. The king might not like this situation, but he has no way of committing to his subjects that he’ll keep his promises to respect property and contract in the future. This, Olson suspects, is why dictatorships rarely seem to have strong economic performances for more than a couple generations.

Olson then tries to contrast dictatorial economic performance with democratic performance, but this is where I lose him.

First, he points out that democracies can be in principle just as confiscatory as dictatorships, but suggests that they are less likely to be. If a democratic majority uses the state to tax the population outside the majority, they will more quickly run into the distortionary effects of their taxation because a majority makes so much more of its income through market exchange than a solo dictator. This seems plausible enough, but then he acknowledges that the formal structures of a lot of democracies actually empower small interest groups. Small interest groups don’t have the same market disincentives as a unified majority, so Olson admits it is not clear what stops them from driving taxes to a dictatorial level. So the general confiscatory picture is perhaps better in democracies, but his theory doesn’t offer a very clear picture why.

Are Democracies Better At Providing Economic Rights?

Even more confusing than Olson’s description of democratic incentives to confiscate is Olson’s next set of claims about democracies and law. He spends the last quarter of the article talking about how democracies do a better job enforcing property and contract rights than dictatorships do, but I don’t think he actually provides much of an argument. Here is a representative quotation:

“Interestingly, the conditions that are needed to have the individual rights needed for maximum economic development are exactly the same conditions that are needed to have a lasting democracy. Obviously, a democracy is not viable if individuals, including the leading rivals of the administration in power, lack the rights to free speech and to security for their property and contracts or if the rule of law is not followed even when it calls for the current administration to leave office. Thus the same court system, independent judiciary, and respect for law and individual rights that are needed for a lasting democracy are also required for security of property and contract rights.”

His argument in this final section seems to be that for a democracy to survive through time, it needs a court system that is sufficiently powerful to make rulers leave office and protect groups outside of power. He then makes the leap of assuming that such a court system must be better at enforcing property and contract rights than a dictatorial court system would be.

I find a few things confusing here.

First, is it really the courts that ensure transition of power in democracies? As Olson notes later in the paper, the key to the organic establishment of a democracy seems to be a rough balance of violent power between competing groups in society who cannot establish dominance over each other and cannot split off from each other. This seems to imply that what keeps democracies going is some underlying stable balance of violent capacity. Writing public law and having courts implement it might be a good way for competing blocks in society to negotiate with each other, but isn’t it ultimately the implicit threat of a fight that’s doing the restraining, not the courts?

With that it mind I wonder if there is any necessary connection between the mechanisms that enforce a peaceful transition of power and the enforcement of property and contract rights against the government generally. It is plausible that a ruling regime in a stable democracy cannot plunder the powerful social groups who are currently outside the regime. But isn’t that because some of those other groups are powerful enough to retaliate? Why would that lead to a general respect for property and contract rights rather than a mere respect for the claims of sufficiently powerful rival blocks in society? Is there an implicit assumption here that eventually everyone gets to be part of a powerful block in a democracy and can politically enforce their rights?

Finally, the concept of “upholding property and contracts rights” blends two things that Olson has been talking about throughout the paper. To the extent that he means upholding property and contract rights against the government he is talking about the dynamics that determine whether or not a government will confiscate. To the extent that he means upholding property and contracts rights between private citizens, he is talking a kind of public goods provision. For the second of these, which is clearly doing a lot of work for him, he is frustratingly silent on why we should expect democracies to do any better. Why would having enforceable rules for peaceful transfer of power have anything to do with providing good private rights enforcement among the public? One might actually expect the opposite given his acknowledgement that democratic administrations have short time horizons.

Despite these complaints, I don’t actually think Olson is necessarily wrong about all of this. I just don’t think he makes enough of a case within the paper. But at least it's thought provoking! Every time I read it I have a bunch of new questions about the relationship between state formation, democratization, and the law. What’s the role of public law in democratization? Do democracies always give their citizens stronger economic rights against the government? Do dictatorships and democracies perform differently in enforcing rights between citizens? I hope to write more on these questions in later posts.