Dictatorship Democracy and_Dev

 

 

 Dictatorship, Democracy, and Development

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Mancur Olson The American Political Science Review, Vol. 87, No.3 (Sep., 1993),567-576. Stable URL: http://links.jstor.org/sici?sici=0003-0554%28199309%2987%3A3%3C567%3ADDAD%3E2.0.CO%3B2-H The American Political Science Review is currently published by American Political Science Association.

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DICTATORSHIP, DEMOCRACY, AND DEVELOPMENT MANCUR OLSON University ofMaryland

_Under anarchy, uncoordinated competitive theft by "roving bandits" destroys the incentive to invest and produce, leaving little for either the population or the bandits. Both can be better off if a bandit sets himself up as a dictator--{l "stationary bandit" who monopolizes and

rationalizes theft in the form of taxes. A secure autocrat has an encompassing interest in his domain that leads him to provide a peaceful order and other public goods that increase productivity. Whenever an autocrat expects a brief tenure, it pays him to confiscate those assets whose tax yield over his tenure is less than their total value. This incentive plus the inherent uncertainty ofsuccession in dictatorships imply that autocracies will rarely have good economic performance for more than a generation. The conditions necessary for a lasting democracy are the same necessary for the security of property and contract rights that generates economic growth.

_In my student days, in reading Edward Banfield's

(1958) account of the beliefs of the people in a

. poor village in Southern Italy, I came upon a remarkable statement by a village monarchist. He said, "Monarchy is the best kind of government because the King is then owner of the country. Like the owner of a house, when the wiring is wrong, he fixes it" (p. 26). The villager's argument jarred against my democratic convictions. I could not deny that the owner of a country would have an incentive to make his property productive. Could the germ of truth in the monarchist's argument be reconciled with the case for democracy?

It is only in recent years that I have arrived at an answer to this question. It turns out that for a satisfactory answer one needs a new theory of dictatorship and democracy and of how each of these types of government affects economic development. Once this new theory is understood, one can begin to see how autocracies and democracies first emerge. I shall set out this conception in a brief and informal way and use it to explain some of the most conspicuous features of historical experience.

The starting point for the theory is that no society can work satisfactorily if it does not have a peaceful order and usually other public goods as well. Obviously, anarchic violence cannot be rational for a society: the victims of violence and theft lose not only what is taken from them but also the incentive to produce any goods that would be taken by others. There is accordingly little or no production in the absence of a peaceful order. Thus there are colossal gains from prOviding domestic tranquility and other basic public goods. These gains can be shared in ways that leave everyone in a society better off. Can we conclude that because everyone could gain from it, a peaceful order emerges by voluntary agreement?

From the logic of the matter, we should expect that in small groups a generally peaceful order will normally emerge by voluntary agreement but that in large populations it will not. The key to the matter is that each individual bears the full costs or risks of anything he or she does to help establish a peaceful order or to provide other public goods but receives only a share of the benefits. In a tiny group, such as a hunter-gatherer band, each person or family will obtain a significant share of the benefits of a peaceful order, and the net advantages of such an order are so great that even a single family's share of the gains can easily outweigh the sacrifices needed to obtain it. Moreover, when there are only a few, the welfare of each noticeably depends on whether each of the others acts in a group-oriented way. Thus each family, by making clear that cooperation by another will bring forth its cooperation but that noncooperation will not, can increase the likelihood that another will match its behavior, thereby increasing the incentive each has to act in the group interest. The theoretical prediction that sufficiently small groups can often organize for collective action is corroborated by countless observations (Olson 1%5).

This prediction is also in accord with the anthropological observations of the most primitive societies. The Simplest food-gathering and hunting societies are normally made up of bands that have, including the children, only about 50 or 100 people. In other words, such a band will normally contain only a few families that need to cooperate. Anthropologists find that primitive tribes normally maintain peace and order by voluntary agreement, and that is to some extent what Tacitus, Caesar, and other classical writers observed among the less advanced Germanic tribes. The most primitive tribes tend to make all important collective decisions by consensus, and many of them do not even have chiefs. When a band becomes too large or disagreement is intense, the band may split, but the new bands normally also make decisions by unanimous consent. If a tribe is in the hunting-and-gathering stage, there is also little or no incentive for anyone to subjugate another tribe or to keep slaves, since captives cannot generate enough surplus above subsistence to justify the costs of guarding them.¹ Thus within the most primitive tribes of preagricultural history, the lOgical presumption that the great gains from a peaceful order can be achieved by voluntary agreement appears to hold true.

 

Once peoples learned how to raise crops effectively, production increased, population grew, and large populations needed governments. When there is a large population, the same logic that shows why small groups can act consensually in their common interest, tells us that voluntary collective action cannot obtain the gains from a peaceful order or other public goods, even when the aggregate net gains from the provision of basic public goods are large.2 The main reason is that the typical individual in a society with, say, a million people will get only about one-millionth of the gain from a collective good, but will bear the whole cost of whatever he or she does to help provide it, and therefore has little or no incentive to contribute to the provision of the collective good. There is by now a huge theoretical and empirical literature on this point, and the great preponderance of this literature agrees that, just as small groups can usually engage in spontaneous collective action, very large groups are not able to achieve collective goals through voluntary collective action.³

Thus we should not be surprised that while there have been lots of writings about the desirability of /Isocial contracts" to obtain the benefits of law and order, no one has ever found a large society that obtained a peaceful order or other public goods through an agreement among the individuals in the society.

THE FIRST BLESSING OF THE INVISIBLE HAND

Why, then, have most populous societies throughout history normally avoided anarchy? An answer came to me by chance when reading about a Chinese warlord (see Sheridan 1966). In the 1920s, China was in large part under the control of various warlords. They were men who led some armed band with which they conquered some territory and who then appointed themselves lords of that territory. They taxed the population heavily and pocketed much of the proceeds. The warlord Feng Yu-hsiang was noted for the exceptional extent to which he used his army for suppressing bandits and for his defeat of the relatively substantial army of the roving bandit, White Wolf. Apparently most people in Feng's domain found him much preferable to the roving bandits.

At first, this seems puzzling: Why should warlords, who were stationary bandits continuously stealing from a given group of victims, be preferred, by those victims, to roving bandits who soon departed? The warlords had no claim to legitimacy and their thefts were distinguished from those of roving bandits only because they took the form of continuing taxation rather than occasional plunder.

In fact, if a roving bandit rationally settles down and takes his theft in the form of regular taxation and at the same time maintains a monopoly on theft in his domain, then those from whom he exacts taxes will have an incentive to produce. The rational stationary bandit will take only a part of income in taxes, because he will be able to exact a larger total amount of income from his subjects if he leaves them with an incentive to generate income that he can tax.

If the stationary bandit successfully monopolizes the theft in his domain, then his'victims do not need to worry about theft by others. If he steals only through regular taxation, then his subjects know that they can keep whatever proportion of their output is left after they have paid their taxes. Since all of the settled bandit's victims are for him a source of tax payments, he also has an incentive to prohibit the murder or maiming of his subjects. With the rational monopolization of theft-in contrast to uncoordinated competitive theft-the victims of the theft can expect to retain whatever capital they accumulate out of after-tax income and therefore also have an incentive to save and to invest, thereby increasing future income and tax receipts. The monopolization of theft and the protection of the tax-generating subjects thereby eliminates anarchy. Since the warlord takes a part of total production in the form of tax theft, it will also pay him to provide other public goods whenever the provision of these goods increases taxable income sufficiently.

In a world of roving banditry there is little or no incentive for anyone to produce or accumulate anything that may be stolen and, thus, little for bandits to steal. Bandit rationality, accordingly, induces the bandit leader to seize a given domain, to make himself the ruler of that domain, and to provide a peaceful order and other public goods for its inhabitants, thereby obtaining more in tax theft than he could have obtained from migratory plunder. Thus we .have /Ithe first blessing of the invisible hand": the rational, self-interested leader of a band of roving bandits is led, as though by an invisible hand, to settle down, wear a crown, and replace anarchy with government. The gigantic increase in output that normally arises from the provision of a peaceful order and other public goods gives the stationary bandit a far larger take than he could obtain without providing government.

Thus government for groups larger than tribes normally arises, not because of social contracts or voluntary transactions of any kind, but rather because of rational self-interest among those who can organize the greatest capacity for violence. These violent entrepreneurs naturally do not call themselves bandits but, on the contrary, give themselves and their descendants exalted titles. They sometimes even claim to rule by divine right. Since history is written by the winners, the origins of ruling dynasties are, of course, conventionally explained in terms of lofty motives rather than by self-interest. Autocrats of all kinds usually claim that their subjects want them to rule and thereby nourish the unhistorical assumption that government arose out of some kind of voluntary choice. (These claims have an echo in some literature in the "transactions costs" tradition that attempts to explain the emergence of various kinds of governments partly or wholly through vol

568

 

untary contracts and the costs of the transactions associated with them. See Barzel 1991; Kiser and Barzel 1991; North 1981; North and Thomas 1973.)4

Any individual who has autocratic control over a country will provide public goods to that country because he has an "encompassing interest" in it.5 The extent of the encompassing interest of an officeholder, political party, interest group, monarch, or any other partial or total "owner" of a society varies with the size of the stake in the society. The larger or more encompassing the stake an organization or individual has in a society, the greater the incentive the organization or individual has.to take action to provide public goods for the society. If an autocrat received one-third of any increase in the income of his domain in increased tax collections, he would then get one-third of the benefits of the public goods he provided. He would then have an incentive to provide public goods up to the point where the national income rose by the reciprocal of one-third, or three, from his last unit of public good expenditure. Though the society's income and welfare would obviously be greater from a larger expenditure on public goods, the gain to society from the public goods that a rational self-interested autocrat provides are nonetheless often colossal. Consider, for example, the gains from replacing a violent anarchy with a minimal degree of public order.

From history, we know that the encompassing interest of the tax-collecting autocrat permits a considerable development of civilization. From not long after the first development of settled agriculture until, say, about the time of the French Revolution, the overwhelming majority of mankind was subject to autocracy and tax theft. History until relatively recent times has been mostly a story of the gradual progress of civilization under stationary bandits interrupted by occasional episodes of roving banditry. From about the time that Sargon's conquests created the empire of Akkad until, say, the time of Louis XVI and Voltaire, there was an impressive development of civilization that occurred in large part under stationary banditry.6

THE GRASPING HAND

We can now begin to reconcile the village monarchist's insight and the foregoing argument with the case for democracy. Though the village monarchist was right in saying that the absolute ruler has as much incentive to fix what needs repair as the owner of a house, his analogy is nonetheless profoundly misleading. The autocrat is not in a position analogous to the owner of a single house or even to the owner of all housing, but rather to the owner of all wealth, both tangible and human, in a country. The autocrat does indeed have an incentive to maintain and increase the productivity of everything and everyone in his domain, and his subjects will gain from this. But he also has an incentive to charge a monopoly Vol. 87, No.3

rent and to levy this monopoly charge on everything, including human labor.

In other words, the autocratic ruler has an incentive to extract the maximum possible surplus from the whole society and to use it for his own purposes. Exactly the same rational self-interest that makes a roving bandit settle down and provide government for his subjects also makes him extract the maximum possible amount from the society for himself. He will use his monopoly of coercive power to obtain the maximum take in taxes and other exactions.

The consumption of an autocratic ruler is, moreover, not limited by his personal capacities to use food, shelter, or clothing. Though the pyramids, the palace of Versailles, the Taj Mahal, and even Imelda Marcos's three thousand pairs of shoes were expensive, the social costs of autocratic leaders arise mostly out of their appetites for military power, international prestige, and larger domains. It took a large proportion of the total output of the Soviet Union, for example, to satisfy the preferences of its dictators?

Some writers use the metaphor of the "predatory state" but this is misleading, even for autocracies. As we saw earlier, a stationary bandit has an encompassing interest in the territory he controls and accordingly provides domestic order and other public goods. Thus he is not like the wolf that preys on the elk, but more like the rancher who makes sure that his cattle are protected and given water. The metaphor of predation obscures the great superiority of stationary banditry over anarchy and the advances of civilization that have resulted from it. No metaphor or model of even the autocratic state can therefore be corre~t unless it simultaneously takes account of the stationary bandit's incentive to provide public goods at the same time that he extracts the largest possible net surplus for himself.

Although the forms that stationary banditry has taken over the course of history are diverse, the essence of the matter can be seen by assuming that the autocrat gets all of his receipts in the form of explicit taxation. The rational autocrat will devote some of the resources he obtains through taxation to public goods but will impose far higher tax rates than are needed to pay for the public goods since he also uses tax collections to maximize his net surplus. The higher the level of provision of public goods, given the tax rate, the higher the society's income and the yield from this tax rate. At the same time, the higher the tax rate, given the level of public-good provision, the lower the income of society, since taxes distort incentives.

So what tax rate and what level of public good provision will the rational self-interested autocrat choose? Assume for the moment that the autocrat's level of public-good expenditure is given. As Joseph Schumpeter (1991) lucidly pointed out, and Ibn Kalduhn (1967) sensed much earlier} tax receipts will (if we start with low taxation) increase as tax rates increase, but after the revenue-maximizing rate is reached, higher tax rates distort incentives and reduce income so much that tax collections fall. The rational self-interested autocrat chooses the revenuemaximizing tax rate.

 

Though the amount collected at any tax rate will vary with the level of public-good provision, the revenue-maximizing tax rate for the autocrat should not. This optimal tax rate determines exactly how encompassing the interest of the autocrat in the society is; that is, it determines what share of any increase in the national income he receives. He will then spend money on public goods up to the point where his last dollar of expenditure on public goods generates a dollar's increase in his share of the national income. At this point, the gain to society will, as we know, be the reciprocal of his share.

Though the subjects of the autocrat are better off than they would be under anarchy, they must endure taxes or other impositions so high that, if they were increased further, income would fall by so much that even the autocrat, who absorbs only a portion of the fall in income in the form of lower tax collections, would be worse off.

There is no lack of historical examples in which autocrats for their own political and military purposes collected as much revenue as they possibly could. Consider the largest autocratic jurisdictions in Western history. The Bourbon kings of France were (especially on the eve of the French Revolution) collecting all they could in taxes. The Hapsburg kings of Spain did the same. The Roman Empire ultimately pushed its tax rates at least to the revenue-maximizing level.

THE REACH OF DICTATORSHIPS AND DEMOCRACIES COMPARED

How would government by a rational self-interested autocrat compare with a democracy? Democracies vary so much that no one conclusion can cover all cases. Nonetheless, many practical insights can Pe obtained by thinking first about one of the simplest democratic situations. This is a situation in which there are two candidates for a presidency or two well-disciplined parties seeking to form the government. This simplifying assumption will be favorable to democratic performance, for it gives the democracy an IIencompassing" interest rather like the one that motivates the stationary bandit to provide some public goods. I shall make the opposite assumption later. But throughout, I shall avoid giving democracy an unfair advantage by assuming better motivation. I shall impartially assume that the democratic political leaders are just as self-interested as the stationary bandit and will use any expedient to obtain majority support.

Observation of two-party democracies tells us that incumbents like to run on a "you-never-had-it-sogood" record. An incumbent obviously would not leave himself with such a record if, like the selfinterested autocrat, he took for himself the largest possible net surplus from the society. But we are too favorable to democracy if we assume that the incumbent party or president will maximize his chances of reelection simply by making the electorate as a whole as well-off as possible.

A candidate needs only a majority to win, and he might be able to "buy" a majority by transferring income from the population at large to a prospective majority. The taxes needed for this transfer would impair incentives and reduce society's output just as an autocrat's redistribution to himself does. Would this competition to buy votes generate as much distortion of incentives through taxation as a rational autocracy doe~? That is, would a vote-buying democratic leader, like the rational autocrat, have an incentive to push tax rates to the revenue-maximizing level?

No. Though both the majority and the autocrat have an encompassing interest in the society because they control tax collections, the majority in addition earns a significant share of the market income of the society, and this gives it a more encompassing interest in the productivity of the society. The majority's interest in its market earnings induces it to redistribute less to itself than an autocrat redistributes to himself. This is evident from considering an option that a democratic majority would have ifit were at the revenue-maximizing tax rate. At the revenue-maximizing tax rate, a minuscule change in the tax rates will not alter tax collections. A minuscule increase in the tax rate will reduce the national income by enough so that even though a larger percentage of income is taken in taxes, the amount collected remains unchanged, and a tiny reduction in the tax rate will i,ncrease the national income so much that even though a smaller percentage is taken in taxes, receipts are unchanged. This is the optimal tax rate for the autocrat because changes in the national income affect his income only by changing tax collections.

But a majority at the revenue-maximizing tax rate is bound to increase its income from a reduction in tax rates: when the national income goes up, it not only, like the autocrat, collects taxes on a larger national income but also earns more income in the market. So the optimal tax rate for it is bound to be lower than the autocrat's. The easiest arithmetic example comes from supposing that the revenue-maximizing tax rate is one-third and that the majority earns one-third of the national income in the marketplace. The rational autocrat will then find that the last dollar in taxes that he collects reduces the national income by three dollars. One-third of this loss is his loss, so he just breaks even on this last dollar of tax collection and is at his revenue-maximizing rate. But if a majority mistakenly chose this same tax rate, it would be hurting itself, for it would lose two dollars (the same dollar lost by the autocrat plus one dollar of market income) from the last dollar it collected in taxes. Thus a majority would maximize its total income with a lower tax rate and a smaller redistribution to itself than would be chosen by an autocrat.9

More generally, it pays a ruling interest (whether an autocrat, a majority, or any other) to stop redistributing income to itself when the national income falls by the reciprocal of the share of the national income it receives. Ifthe revenue-maximizing tax rate were one-half, an autocrat would stop increasing taxes when the national income fell by two dollars from his last dollar of tax collection. A majority that, say, earned three-fifths of the national income in the market and found it optimal to take one-fifth of the national income to transfer to itself would necessarily be reducing the national income by five-fourths, or $1.25, from the last dollar that it redistributed to itself. Thus the more encompassing an interest-the larger the share of the national income it receives taking all sources together-the less the social losses from its redistributions to itself. Conversely, the narrower the interest, the less it will take account of the social costs of redistributions to itself.