The Use of Force in Society: Defining The State in Introductory Economics By Art Carden

This is an edited version of my comment on this Reddit thread. OP had offered this quote from his microeconomics professor: “Government is the only institution which is allowed to hold a gun to your head and force you to pay for its services. That’s the only way it can do business.”

James Gwartney has tried and measured the leading textbooks in economics, and he has found them wanting. There is a lot of discussion of market failures and how governments can address them, but there is relatively little discussion of how people respond to incentives when they work for the government. Moreover, I don’t think there’s enough discussion of exactly what a state is and what it does.

When we’re saying “the government should intervene,” we’re saying “an organization with guns should threaten to lock people in cages if they don’t comply with its dictates.” Yes, it would be very nice if governments were bargaining or just making suggestions, but we shouldn’t be naive about the fact that governments are holding guns under the table–and in some cases, above the table.

Maybe we’ve all agreed to delegate authority to that organization, but violence is at the heart of what it means for an organization to be a state. Last week, I gave my principles of macro students Douglass North’s definition of the state from “Structure and Change in Economic History”: “an organization with a comparative advantage in violence, extending over a geographic area whose boundaries are determined by its power to tax constituents.” Unpacking this just a little bit carries students toward a richer understanding of the world we actually observe, and it will be of primary importance when we talk about different economic systems and the ultimate causes of the wealth of nations.

Here are examples of standard material where defining and discussing the state is relevant:

Trade. There are multiple ways of encouraging cooperation; coercion is one, persuasion is another. Assumptions about property rights are embedded in exchange, though no textbooks of which I’m aware make this point. If you’re going to trade with someone, then you are recognizing that your trading partner has the right (or the ability, backed up by force) to say “no” to your offer.

Price Controls. Who decides that we’re going to have price ceilings or price floors? How do governments enforce them?

Externalities & Public Goods. Who taxes the bad ones and subsidizes the good ones if not a state? As Coase showed, the fundamental problem in these cases is that property rights are poorly-defined or poorly-enforced. With well-defined and well-enforced property rights Pigovian solutions are superfluous. John Nye explored this in detail in a 2008 article in Regulation.

Market structure and monopoly. Who does the regulating? How do they regulate? Is it wise to treat these regulations as free lunches (which most treatments do)?

Taxes and Subsidies. How do governments collect taxes?

Any market failure. If we treat the possibility of market failure as prima facie evidence that the government can intervene advantageously without giving serious thought to the possibility of government failure, we aren’t thinking about the problem correctly and doing our students a disservice.

Public Choice. Public Choice gets the short shrift from most books and courses, to the detriment of all. Students can get a richer understanding of their world if we don’t treat the state as a deus ex machina and instead seek to understand it as an organization comprised of people with their own goals, incentives, and bits and pieces of information.

I tell my students that economics as such cannot tell you which values to have or what is objectively right and objectively wrong. Economics is essential to careful moral and social reasoning, however, because it brings the trade-offs we’re making–and the assumptions we’re making about what we can and cannot do unto others–into high relief.