Economic Theories Of The State Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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According to an economic theory of the state, the state is best understood as the outcome of voluntary individual action. Its methodological foundations are individualistic as the preferences of individuals are taken as the basic starting point from which subsequent actions and institutions are to be theorized. It combines a self-interested view of human behavior with an account of how and when individuals will choose to collaborate and act collectively. The state is seen as a collection of rules and institutions created by individuals for the purpose of acting collectively, as opposed to individually, to realize some benefit. The state itself is theorized as a form of cooperation, or as the outcome of cooperative behavior. Individuals are able to produce numerous types of benefits acting collectively that they cannot achieve acting alone, and the rules and institutions of the state are theorized as mechanisms for securing the ongoing production of this sort of benefit.

The economic theory of the state can be contrasted with other theories of the state. It is in contrast to organic views of the state that theorize the state as an autonomous entity that exists prior to and beyond the individuals that compose it, exemplified by the relationship between bees and their beehive. Its notions of voluntarism and cooperation distinguish it from conflict views of the state, which theorize it as an instrument of class domination. Also, the idea of its instrumental value with respect to individual interests contradicts the view of the state that theorizes its purpose as realizing a collective ideal or public interest beyond the individual well-being of its members.

State Origins And Provisions

The economic theory of the state provides explanations for both the origins of states and the range of its functions in a political society. Acting individually, in a state of nature, persons are unable to secure numerous goods in which they have an interest in producing. Perhaps the most basic of these is achieving peaceful reconciliation of competing claims to scarce resources. This is done by the state by creating property rights and rules for resources’ use and exchange, which are enforced by the coercive capacity of the state.

Upon achieving basic security of the person and property, individuals will make further use of collective mechanisms to produce cooperative benefits. One such benefit is the coordination of activities that allows for orderly social living, such as basic rules concerning traffic direction and so forth. This type of strategic interaction imposes no costs on individuals in the production of cooperative benefit and thus is free from the collective-action problem of free riding.

The problem of free riding explains why states are required for the provision of public goods beyond simple coordination functions. A public good is defined by being-nonrival, meaning that its consumption by one individual does not lessen its availability to others, and by being nonexclusive, meaning that once it is provided, others cannot be excluded from it. A lighthouse in a harbor is an example of a public good. Public goods are prone to under provision when left to private production because there are strong incentives to free ride on provided public goods. Self-interested individuals would prefer to consume a good without contributing to its production and be unwilling to produce a benefit that others can enjoy without contributing to it. In this case, it is mutually advantageous to cooperate through public provision.

Another cooperative benefit that the state secures is the reduction of uncertainty and exposure to natural and social risk. Acting alone, individuals will be unable to adequately limit uncertainty and secure against risk. While private insurance markets will arise to address many forms of uncertainty, the state will be required to address market failures in its provision. These include moral hazard and adverse selection resulting from information asymmetries between buyers and sellers as to the level of risk, causing heightened costs and incomplete or exclusionary coverage. State-run insurance has further advantages over private provision, such as reducing administrative costs, economies of scale, and equity in cost of coverage for high-risk, low-income groups.

Other examples of market failure that create incentives to collectively provide goods through the state include monopoly power and negative externalities. Producers with monopoly powers are able to charge inefficient prices, and a possible remedy is to place the industry in public ownership. The state is also able to internalize the full costs of an economic activity in the producers; without its regulatory capacity, the costs could be imposed, or externalized, onto the population at large. The pollution resulting from industrial production is an example of a production cost that can be externalized onto society without state action.

Criticisms Of Economic State Theory

Economic state theory is criticized in both its explanatory and prescriptive dimensions. Descriptively, the provision of public goods as an explanation of the origins of states is widely called into question. Without the institutions of the state, persons are unable to successfully cooperate because of the lack of coordination and free rider problems. The state in this view is called on to secure the benefits of cooperation. However, the state itself is also theorized as the outcome of cooperation, such that persons are supposed to have produced a public good for the purpose of producing other public goods they were unable to achieve without the state. By way of response, rather than explaining the origins of states, the provision of public goods accounts for the ongoing support for states and as an explanation of the functioning of the public sector.

Economic state theory is also criticized for justifying an overly narrow range of functions for the state. Because the state is justified as a mechanism for promoting individual interests in a mutually advantageous manner, it rules out redistributive policies that lessen the advantage of some citizens for the sake of improving the condition of the disadvantaged. The political economists James M. Buchanan and Gordon Tullock, for example, argue that the principle of mutual advantage in an economic theory of the state leads to the requirement of unanimity in support of legislation, effectively granting a veto to those who gain from market exchanges. In addition to normative concerns regarding the resulting inequality that would result, there are further questions as to the potential stability of a state that is limited to the principle of mutual advantage.

Bibliography:

Buchanan, James, and Gordon Tullock. The Calculus of Consent. Indianapolis, Ind.: Liberty Fund, 2004.
Heath, Joseph. “The Benefits of Cooperation.” Philosophy and Public Affairs 34, no. 4 (2006): 313–351.
Mueller, Dennis, ed. Perspectives on Public Choice. Cambridge: Cambridge University Press, 1997.
Olson, Mancur. The Logic of Collective Action. Cambridge, Mass.: Harvard University Press, 1971.