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Long-term economic prosperity requires the existence of secure property rights. A resource, in the possession of an individual, can be characterized as secure property if that individual can exclude others from exploiting its use. So, as the fundamental instrument of exclusion, who should have recourse to violence? In a world where violence is a recognized margin of competitive adjustment available to all community members, a world of unorganized violence, an individual’s exclusive right to use a resource is determined in large part by his or her ability to use naked violence to protect that resource from others. This fact creates an incentive for all community members to allocate scarce effort away from production and toward protection and/or predating on others—both of which undermine a community’s potential for prosperity.
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A solution to this inefficient outcome is to structure a world of organized violence, a world where violence is managed and access to it is limited to a subset of the community. In other words, community members can choose to structure a political economy. One such example is the state. In its simplest form, the state consists of a third party (e.g., a prince, king, queen, prime minister, and/or president) and constituents. The fundamental exchange undergirding the state involves constituents surrendering their autonomy, forgoing their rightful recourse to violence, and providing some sort of compensation (e.g., tax revenue) to the third party in exchange for secure property rights. Decisions regarding the projection of violence are reserved for the third party. Structuring a political economy also includes deciding on the number, character, and composition of those that the third party can call upon to violently enforce property rights (e.g., citizens militias, police, military and/or paramilitary forces). However, when deciding how to organize violence, the members of any community confront a dilemma. Centralizing too much violence potential in too few hands can be an inefficient alternative to a world of unorganized violence. The power disparity between the third party and its constituents can create an incentive for the third party to predate on its constituents and consequently destabilize its own property rights regime. Constituents can confront this challenge by dissipating the third party’s violence potential. This can be accomplished by choosing a more decentralized organization of violence—for example, one in which access to violence is granted to more individuals other than the third party and his or her forces (e.g., a citizens militia). However, this organization can weaken the third party and invite external and internal rivals to challenge the established order, thereby also destabilizing property rights. In other words, economic prosperity requires the presence of a third party that is powerful enough to establish and enforce property rights but not so powerful that its presence destabilizes these rights. This tension is known as the credible commitment dilemma. Successfully managing this tension is pivotal to secure property rights and hence economic prosperity.
Violence and Economic Prosperity
The fundamental purpose of this research paper is to explore the role that violence plays in the determination of a community’s economic prosperity. We begin by acknowledging the fact that we live in a world of scarcity. There are simply not enough resources available to satisfy every want. We also reside in a world populated by individuals with a multiplicity of desires, wants, and preferences. Alternative uses are envisioned for some, if not most, and maybe all scarce resources. Competition—two or more individuals placing simultaneous demands upon the same resource— is our constant companion. In general, if one individual currently possesses something that another desires to allocate toward an alternative use, there is one of two ways that such a conflict of interest can be resolved. The individual who does not currently possess the resource can trade away something he or she does possess in exchange for that which he or she desires, or the individual can forcibly take it. Whether this interaction results in attempted trading or taking is contingent on whether or not possession, by the individual who currently holds the resource, translates into exclusive ownership. In other words, does this individual have secure property rights over this resource? Property rights, in a world of scarcity and competition, are only as exclusive as others around you allow them to be. Those around you have to decide whether or not to respect your rights. Respect can be earned by your ability to personally exclude the encroachments of others and/or bestowed by your community. The latter is most conducive to a voluntary value-creating rearrangement of resources and therefore economic prosperity.
Among neighboring individuals, violence has been and continues to be a fundamental way of deciding issues of ownership—this is mine and this is yours. Within the confines of this research paper, violence is defined as the use or threatened use of scarce resources for the sake of imposing physical costs on others. We will define unorganized violence as a context in which violence is a widely recognized and practiced method of establishing exclusivity. As you may expect, unorganized violence is inimical to economic prosperity. It can lead to the absolute destruction of resources and productive assets (e.g., the killing and maiming of people and livestock and the destruction of infrastructure—including roads, bridges, hospitals, and schools). It can also create an incentive for individuals to redirect their efforts from otherwise growth-augmenting endeavors—specifically taking the steps to enhance their individual productivity.
Productivity—how much output an individual can produce in one hour of his or her time—is the key to economic prosperity. An individual’s productivity is a function of the degree of specialization in his or her community and his or her access to capital (both physical and human) and technological innovations. Choosing to specialize, gaining access to capital, and taking advantage of technological innovations are investments that the members of a community must be willing and able to take. Investments, how-ever, entail a trade-off. The individual must forgo some level of current consumption and other alternative uses of his or her time in exchange for enhanced future productivity and returns. For some extended period of time, this person is tying up today’s scarce resources in the pursuit of future returns. Returns that lie in the future are returns that can never be guaranteed. Indeed, the longer that resources are tied up in a particular investment, the greater the risk of conditions changing and thereby threatening his or her returns. Every investment, necessarily, is a risky action that not everyone will find worthwhile to take.
Ubiquitous violence only makes making investments more risky. For example, knowing that everyone else, like you, has recourse to violence, you confront a fundamental trade-off when attempting to arrive at an income-maximizing allocation of effort. Namely, in the context of unorganized violence, your exclusivity over resources is determined in large part by your comparative advantage in violence. Necessarily, every unit of effort invested in enhancing your productivity raises your opportunity cost of allocating effort toward violence. Enhancing your productivity dissipates your comparative advantage in violence. Indeed, your enhanced income-producing potential combined with your diminished willingness to enforce an exclusive claim to that income (it has simply become more costly to exclude) makes you a more lucrative target. Your investment in the future motivates those around you to predate upon you. Looking forward to this possible outcome, you may choose against this act. Indeed, you may enjoy relatively more secure property rights—albeit over limited property and diminished income streams—by being less productive. Choosing relative poverty may insure you against being victimized.
Beyond adversely influencing the level of investment in the economy, unorganized violence induces a number of other growth-discouraging dynamics. For example, you may enjoy a higher standard of living by simply protecting what you already have from your neighbors or by predating upon them. Necessarily, you may have an incentive to invest scarce time and effort into enhancing your protective and/or predatory potential. These investments include the development of your potential to impose physical costs on others by investigating new techniques and/or training in traditional techniques of violence. These investments can also include the steps taken to diminish the potential of competitors to impose costs on you by building fortifications, training dogs, and finding hiding places for your wealth. Protective measures can also include shying away from interacting with others—which is not conducive for the creation markets.
A market exists whenever a buyer and seller of a particular good or service conclude that their interaction is mutually beneficial. The extent of a market for a particular good or service is determined by the number of mutually beneficial exchanges that occur between buyers and sellers. Necessarily, any force that diminishes these mutual benefits—the gains from trade—threatens the existence and extent of markets. A number of forces can influence the gains from trade. We are concerned with transaction costs—the cost of engaging in exchange—which include search, bargaining, and enforcement costs. Our focus is on enforcement costs. In particular, before the conclusion of an exchange, a buyer may ask, “Will I get what I paid for?” Conversely, the seller may ask, “Will I get paid?” An exchange environment that is characterized by mutual trust and hence low enforcement costs allows both to answer the aforementioned questions affirmatively and capture the gains from trade. However, in the context of unorganized violence, where mutual trust is lacking, enforcement costs will be significant. Consequently, in this exchange environment, the gains from trade will fall, fewer and fewer exchanges will be concluded, and markets will either shrink or fail to exist.
This is important because the returns that attend all three aforementioned productivity-enhancing investments are positively associated with the existence and extent of markets. If markets do not exist, then there is no opportunity to make investments. Even if markets exist, if their extent is limited, then the returns for these investments may be too low to make them worthwhile.
Unorganized violence also creates an incentive for you to manage your possessions and resources in such a way so as to maximize their liquidity. You can accomplish the latter by not tying up your resources in investments whose benefits are delayed. Your neighbors confront the very same trade-offs. In consequence, market size will be reduced, and what property is possessed will remain portable to enhance its liquidity. Incentives are such that it may be individually rational to forgo specialization, productivity-enhancing pursuits, and potentially mutually advantageous exchanges with others. Either way no one individual in the community is taking the costly and risky steps toward becoming a productivity-enhancing specialist short-circuiting the emergence of markets and disabling the fundamental engine of economic prosperity.
Why the State Is Necessary for Economic Prosperity
Social order, the opposite of unorganized violence, is widely recognized as a necessary condition for long-term economic prosperity. Order exists when community members find it worthwhile, given their expectations about the actions of others, to respect and defend the rules that delineate claims of ownership. By adhering to a set of rules and agreeing not to predate upon each other, members can reduce the amount of resources allocated toward protective purposes. By agreeing to punish predators in their midst, the returns to predation fall, hence discouraging this activity. Moreover, by working together, they may be able to realize a higher level of exclusivity at lower cost. All possibilities free up scarce resources for productivity-enhancing pursuits and allow for the value-creating rearrangement of resources to take place through trade as opposed to violent struggles. Yet, how does a community of rational self-interested individuals realize social order?
As opposed to the status quo (unorganized violence), social order provides an opportunity for mutually beneficial interactions. Necessarily, there will be a demand for some property rights to govern the community’s interactions. It is the supply, monitoring, and enforcement of these rights that are the fundamental hurdles to the emergence of order (Ostrom, 1990). The supply of a set of rules that yields social order will make the whole better off; however, the rules may not make everyone equally better off. Disagreements, necessarily, may emerge over which set of rules to put in place. Even in the case of symmetric benefits, the costs of supplying these rules may not be borne equally by all members. Moreover, supplying a new set of rules is a public good. Individual members have an incentive to secure these benefits without bearing any cost. Ignoring these difficulties, whether or not a set of rules yields benefits above and beyond those that attend unorganized violence, is contingent on whether or not those subscribing to them actually abide by them. It is here that additional difficulties arise.
One way to realize social order is by some or all individuals making up a community to choose to cooperate in a mutual defense pact, which obligates everyone to respect and defend the rights of others. Respecting the rights of others is costly. It requires one to accept the way in which ownership is defined and structured. The individual bears all these costs—the forgone benefits one could have enjoyed by simply taking what he or she deemed desirable—yet enjoys only a share of the benefits that attend the consequent stability. Similarly, when defending the rights of another, an individual bears fully the opportunity cost of the resources allocated toward this task but enjoys only a share of the benefits. In both cases, the community at large enjoys the remaining share. Respecting and defending the rights of others are public goods. Every member of the community has an incentive to free ride on the effort of others. Everyone in the group is susceptible to this temptation. Everyone in the group knows that everyone in the group is susceptible to this temptation. No one member of the mutual defense pact can truly trust that others will abide to the agreement. This heightens the temptation to renege even more—all choose to be violent. It is their dominant strategy.
This outcome can be avoided if everyone commits to respecting the rules. The idea here is that by committing to respect the rules, you can effectively alter others’ expectations concerning your behavior, and by altering their expectations, you can alter the behavior of those around you. They expect you to respect and defend the rules, which in turn favorably alter their marginal net return to respecting and defending the rules. The process of committing yourself and the group may be as simple as you and the group asking each other, “Will you abide by the rules?” The question is whether or not your respective replies, “I will abide” and “We will abide,” are believable. Will they alter your expectations concerning their behavior? Will you change their expectations concerning your behavior? They may not believe you. They may not be telling you the truth. Your respective replies lack credibility for the simple reason that they go against rationality.
Rationality dictates that an individual should ex ante promise to abide by the rules and ex post renege when everyone has invested costly effort into productive pursuits. The cost of a promise is negligible. And if everyone else cooperates, you can enjoy a share of the output they produce by predating upon them. It is possible that other members of the group will attempt to monitor your actions and, if necessary, exclude you from the benefits that attend order; however, two things make it possible for your strategy to be successful. Like the supply of rules, monitoring is a public good. It will be undersupplied by the rest of the group. Moreover, even if you were caught attempting to predate, you could expect not to be punished. Enforcement is also a public good. It will not be supplied, by the group, at the efficient level. This logic holds for every member of the group. They all can enjoy the benefits of order without bearing the costs. Commitments, without effective monitoring and enforcement, lack credibility (Ostrom, 1990). Neither your expectation concerning their behavior nor their expectations concerning your behavior will change. Consequently, forward-looking individuals, expecting both services to be undersupplied, may find it worthwhile to continue to invest in protecting what they have. Indeed, it may be worthwhile to continue to encroach, take, rob, and steal. Prospective members are also cognizant of the fact that when conditions change, those who agree to be bound by the rules today may find it worthwhile to break them tomorrow. Given the aforementioned difficulties, we would not expect a collective of rational self-interested individuals to be capable of supplying order and self-regulate violence in their community. Even if one member of the group were willing to bear solely the cost of supplying a set of rules, looking forward, he or she would expect that commitments lack credibility. Consequently, any effort this individual would allocate toward structuring a set of rules would be a fruitless endeavor (Ostrom, 1990). Unorganized violence, however, does not characterize all communities (Molinero, 2000). In the following sections, we review the conditions that can yield credible and non-credible commitments and how changes in these conditions are intimately related to the emergence of the state.
Order can arise by voluntary agreement when groups are small for two reasons. With the benefits of supplying social order shared among a smaller number of individuals, the net advantages of doing so may be positive (Olson, 1965). Even in the presence of the positive externality, individuals may still be willing to respect and defend others’ property rights. Smaller numbers also facilitate one’s ability to supply order. Individuals in smaller communities are for the most part related to each other through blood, marriage, or both (Diamond, 1999). When a conflict does arise, the parties to the conflict will share many kin who have the ability to intervene, adjudicate, and apply pressure for a nonviolent resolution (Diamond, 1999). Moreover, the relationships among members of small communities are not characterized by one-shot interactions— they are repeated. If one member of the collective is deciding whether or not to act against the prevailing order, the lost opportunity of no longer engaging in trade with the rest of the community can be a forceful constraint (Axelrod, 1985).
The larger share of benefits enjoyed coupled with the familiarity and repeated play that characterizes small communities are favorable conditions for the emergence of order; however, they can be ephemeral. The rising living standards that accompany social order, including increased life expectancy and decreased mortality rates, translate into population growth. Population growth brings opportunities and challenges. Additional community members, with their unique preferences and abilities, can allow for the introduction of new goods and services and the lowering of transformation costs, through competition and economies of scale. Capturing them, however, is contingent on the successful conclusion of an increased number of exchanges with multiple trading partners. It is here where difficulties crop up. An increase in the number, and maybe the diversity, of exchange partners increases the complexity of the economic-exchange environment. These new exchange partners may require monitoring because having another exchange partner(s) limits the need to return again and again to a previous exchange partner. Forward-looking exchange partners recognize that it may be worthwhile for the partner in trade to renege. Consequently, more monitoring will be required, and exchanges may become more costly to transact, limiting the potential to capture the aforementioned gains that attend population growth.
It is also reasonable to assume that beyond a certain population threshold, social order begins to break down (Olson, 1965). Large numbers erode the familiarity and repeated play that characterized earlier interactions. They also diminish the share of the benefits that attend supplying order. Both forces adversely influence the net advantages of this activity. Knowing that others like you are unmotivated to supply, monitor, and enforce order, individual maximization predicts that if one’s interests are better served by breaking the predominant order, then one will do just that. Necessarily, conflicts of interests become more frequent. Moreover, even if you wanted to monitor and enforce order, your ability to do so may be handicapped by the simple fact that you may no longer know both sides to a disagreement. Commitments begin to lose their credibility. Conflicts become more frequent and can escalate if either one or both parties to a dispute summon friends and family members to aid them in an armed threat or attack on the other. The community’s ability to self-regulate violence begins to erode.
Unorganized violence, however, may not return. It can be forestalled by the community splintering (Molinero, 2000). One or more subgroups simply relocate and set up independent albeit smaller communities. Splintering forestalls the descent into chaos by reducing the population of the group to the point at which it once again is possible to leave the supply of order to the group as a whole. Each subgroup forgoes the benefits of a large population and relatively more complex economic environment. Smaller numbers and simpler economies, however, insure it against internecine chaos. Splintering, as a conflict resolution technique, seems possible as long as resources are relatively free and abundant, property rights are nonexistent, and emigration costs are low (Molinero, 2000). Splintering allows social order to return as commitments once again gain credibility. Social order results in population growth. Continued population growth allows conflicts once again to arise. This pattern of spin-off and population growth continues. At some point, however, some or all of these communities conclude that they are either unwilling or unable to splinter any further. Our analysis, which began its focus on a community of independent individuals, is now focused on a neighborhood of autonomous communities— none of which, in the presence of the others, has an incentive to limit its population growth. The search for an alternative source of credible commitment begins.
The state can provide a solution to the difficulties of organizing order. The fundamental exchange underlying the state involves a third party and constituents. In exchange for an exclusive share of the output that attends order, constituents forsake violence as an income-maximizing strategy and centralize violence into the hands of the third party (which can be either an individual or a group of individuals). The state, consequently, is defined as an organization with a comparative advantage in violence extending over a geographical area (North, 1979). Why would the third party take on this task? It is because of the residual— which is the difference between the output that order makes possible to be produced and the sum of output promised to constituents (Alchian & Demsetz, 1972). This difference, guaranteed to the third party by constituents, is maximized when the third party allocates the efficient level of effort toward monitoring and enforcing property rights. This is a problem that the community found difficult to solve previously. Now, when constituents turn to each other and commit to respecting each other’s property rights, the third party’s presence lends them credibility. Indeed, if anyone were to encroach on the rights of another, the third party is willing and able to punish this behavior. No longer feeling the need to maintain or invest in their violence potential so as to deter or otherwise predate on others, scarce effort is freed up and can be allocated toward enhancing their productivity. One of the fundamental advantages of having a third party structure and enforcing property rights is that economies of scale attend this particular form of specialization or monopolization of this task. It is simply less costly for the state to provide these services rather than the overlapping and redundant actions of community members. In other words, the same degree of exclusivity may be realized at a lower cost or a higher degree of exclusivity at the same cost. By endowing the third party with the motive (i.e., ownership of the residual) and the means (i.e., monopoly on violence) to monitor and enforce property rights, each constituent’s dominant strategy becomes cooperation; thus, the gains from social order can be captured.
Why the State Is Not Sufficient for Economic Prosperity
The value of the state lies in the fact that its representatives have an incentive to supply, monitor, and enforce a set of property rights. Indeed, the state is a mechanism by which citizens can credibly commit to recognizing and respecting the rights of others. However, when contemplating the value of citizenship, an individual considers not only the way in which property rights are structured, which stipulates his or her exclusive right to the gains that attend order, but also their stability. One way to express the idea of stability is to consider it from the perspective of a prospective constituent. Stability is realized if, upon entering the state, no other constituent has an incentive to allocate scarce effort toward violently restructuring your rights in the hopes of realizing a more favorable outcome. Enforcement, of course, is the key concern here. Is the third party willing and able to exclude other constituents and rivals to his or her rule? Because of the residual, we know the third party is definitely willing. Moreover, because of his or her monopoly on violence, the third party is also able to do so. Stable property rights, therefore, are intimately related to the third party’s comparative advantage in violence. The lower the opportunity cost he or she confronts when projecting violence, the less costly is it for him or her to exclude others, and the more secure are property rights. However, there is a trade-off. By centralizing violence and in essence volunteering to be coerced, constituents transfer from themselves onto the third party the incentive to employ violence as an opportunistic income-maximizing strategy. Having given up their arms and made the costly investments to enhance their productivity, constituents have become lucrative targets for predation. The third party has the motive (income maximization) and the means (comparative advantage in violence) to act opportunistically and restructure property rights in his or her favor. Indeed, our history is resplendent with countless occurrences of the state using its monopoly on violence to override the very rights it is organized to protect. In other words, while constituents are able to credibly commit to recognizing and respecting each other’s property rights, the third party is incapable of such a credible commitment. This is a source of instability whose consequences include prospective constituents reconsidering statehood. Indeed, rational individuals would never agree to a contract that made it incumbent upon them to give up their right to defend themselves when it is possible that once they enter into the contract, another may prey upon them. Necessarily, stability is a function of the third party’s willingness and ability to not only enforce but also credibly commit to property rights.
Making the State a Sufficient Condition for Economic Prosperity
Barzel (2002), in his theory of the state, addresses the third party’s inability to credibly commit and offers the following solution. Prospective constituents, before inviting another individual or group of individuals to take on the role of the third party, construct a “collective action mechanism” with which to protect themselves against the consequent differential in power. Barzel, however, does not provide an explicit example of such a collective action mechanism. North and Weingast (1989) arrived at this conclusion a decade earlier. In their case study of seventeenth-century England, they concluded that power-sharing rules that give rise to political “veto players” can check the king’s incentive to arbitrarily restructure property rights. Barzel acknowledges that mechanisms along the lines of North and Weingast are at times incomplete guarantees against the abuse of power; however, he does not address the fact that if prospective constituents are capable of looking ahead and recognizing that the third party is incapable of credibly committing to property rights, then why are they not just as capable of looking ahead and addressing the limitations of their chosen collective action mechanism?
Humphrey (2004) extends Barzel’s (2002) analysis by providing an example of such a collective action mechanism. Constituents recognize that by dissipating the third party’s comparative advantage in violence, they can diminish the returns that attend predation and thereby blunt the third party’s incentive to prey upon them. They can accomplish this by choosing to organize state-sponsored violence in a way that purposively increases the cost of motivating and coordinating the community’s scarce resources toward violent ends. For example, they could choose a more decentralized organization of violence that increases the number and changes the character and composition of those who have access to violence (e.g., a citizens militia). Such an organization will increase the third party’s costs of employing violence as an opportunistic strategy. Moreover, if the costs are greater than the returns, then it is worthwhile for the third party to commit. Rationality dictates that he or she does. Indeed, his or her commitment is credible. Consequently, stability is also negatively related to the third party’s comparative advantage in violence.
The implementation of such a collective action mechanism, however, is attended by a significant trade-off. Indeed, the problem is more complex than originally framed. Earlier we discussed how our original community could use splintering as a conflict mitigation mechanism. Over time, splintering will result in a neighborhood of communities. These communities also confront the same world of scarcity and competition. Realizing a cooperative solution in this context, however, is much more difficult. The conflict mitigating mechanisms of small groups are less effective between groups—for the same reasons enumerated above within a community. Unorganized violence is the likely state of affairs among independent communities. Therefore, when it comes to enumerating those individuals whose actions can influence the stability of a prospective constituent’s property rights, we must add to that list external rivals to the third party’s rule. Consequently, actively dissipating the third party’s comparative advantage in violence can signal weakness to its rivals— enticing them to predate. Although willing to enforce property rights, the third party may no longer be able.
Stability will only be realized when the third party’s rivals (both internal and external) recognize and respect his or her constituents’ property rights. Prospective constituents must reconsider allowing the third party to maintain a monopoly on the community’s violence potential. However, as we already know, this may induce the third party to renege. The risky step centralizing violence will not be acted upon until another collective action mechanism, one that can be substituted for the decentralized organization of violence, can be implemented. For example, instead of the third party unilaterally deciding when, where, and upon whom to project violence, one solution to this tension would be to introduce politics into these decisions. This can be accomplished by increasing the number of individuals who have a say in the use of violence and manipulate their character (popularly elected or appointed) and composition (bicameral or unicameral system). If these constitutional innovations are adopted, then the community can feel comfortable proceeding with the centralization of violence. Moreover, by simultaneously choosing to centralize violence and decentralize the decision to employ violence, the third party may now be capable of signaling strength to his or her rivals and weakness to his or her constituents. Consequently, managing the credible commitment dilemma requires paying attention not only to the number, character, and composition of those who have recourse to violence but also to the number, character, and composition of those who have a say in its use.
Applications and Empirical Evidence
England’s Glorious Revolution of 1688 furnishes an opportunity to evaluate the claims of the aforementioned discussion. North and Weingast (1989) have already demonstrated the role of the Glorious Revolution in establishing the conditions under which the state can credibly commit to property rights. However, there is more to the story—namely, Article VI of the Bill of Rights. Per Article VI of the Bill of Rights, William III, in exchange for the crown, surrendered to Parliament one of the king of England’s historical prerogatives: absolute decision-making authority over England’s military establishment. The Glorious Revolution, by giving Parliament sovereignty over state-sponsored violence, created conditions under which the state could raise and maintain a standing army without threatening property rights. Thus, the emergence of Parliamentarians, whose bundle of political rights included a “veto” over military-related decisions, played a pivotal role in enhancing security by allowing the state to place instruments of violence continuously, even in times of peace, in the hands of professionals, thus allowing the state to realize the efficiency-enhancing benefits of a flexible, immediate, and overwhelming response to property right-destabilizing challenges from rivals inside and out-side the state—without threatening its own constituents. Pamphlets, authored by political activists during this period of history, provide evidence that constituents were cognizant of the tension surrounding the choice of how to organize violence, of the inadequacies of collective choice mechanisms alone as credible commitment devices, and how their attempts to address this tension had a measurable influence on the political-military structure of their community (Humphrey & Hansen, 2010).
In economics, we have a definition of the state. The state is an organization with a comparative advantage in violence that extends over a geographic area. For the most part, economists are in agreement regarding the valuable role that the state plays realizing social order. Economists, however, have not adequately explained the process by which the state emerges. That is, we do not fully understand how an individual or group of individuals centralizes and thereby creates a comparative advantage in violence. In theories of the state, the third party is either simply assumed or the story usually told is that self-interested individuals (some subset or the entire population of a community) recognize the aforementioned benefits of centralizing violence in some entity and invite either one of their own or an outsider to specialize in this role. Indeed, looking forward, these individuals recognize that if the conditions are right (the third party has a sustained monopoly on violence), then favorable forces are put into play, which provide the third party with an incentive to not only regularize his or her rate of taxation but also supply ancillary public goods that further facilitate economic growth (North, 1979; Olson, 1993). A number of scholars, however, argue against this process of state formation. Economic agents, they argue, are inherently jealous of their autonomy. The idea that self-interested individuals would willingly subject themselves to a third party is fanciful. In addition, as we have already discussed, prospective citizens will forgo membership until the state can credibly commit to the rules it created. Yet, with respect to social organization, the long-term historical trend has been an increase in the centralization of violence potential. Olson (2000) was correct when he informed us of who the bandits (the “violent entrepreneurs”) were—they were the ones “who can organize the greatest capacity for violence” (p. 568). We need to open up the hood of this comment. Is it a function of their ability to finance the minimum efficient scale of military operations? We are not sure. Does one’s capacity for violence stem from their physical attributes? In this case, we know the answer is no. It is a biological fact that the weakest can kill the strongest and/or a subset of the weakest can collude and kill the strongest (Molinero, 2000). The process of organizing organized violence—and, in consequence, accumulating and centralizing political authority—still needs to be explored. Here are some things to consider:
- Collusion among a subset of the weakest requires some degree of cooperation; however, given that we are talking about small groups, the costs of acting collectively—in particular the costs of monitoring each others’ behavior—are minimized. Understanding the conditions that allow for and frustrate the emergence of cooperation in the collective act of projecting violence may provide insight into the conditions that allow for and frustrate the emergence of the third party.
- Earlier we discussed how unorganized violence creates a disincentive to make productivity-enhancing investments. However, it is important to note that those who become more productive may now be able to purchase the violence potential of others. In other words, the relatively more prosperous can also be deadly by co-opting predators into becoming protectors. A constraint on this possibility is that there must exist a low transaction cost environment in the market for violence. Those who are now in the position to purchase the violence potential of others must be able to answer yes when they ask, “Will I get what I paid for?” Conversely, those who are selling their violence potential must be able to answer yes when they ask, “Will I get paid?” Issues of credibility once again arise. The market for violence needs to be explored.
- Among competing states, war can be a selection mechanism—selecting for survival those states that structure and enforce a system of political and economic property rights that capture the gains from cooperation. Changes in the complexity of the instruments and/or tactics of warfare will require concomitant changes in the organization of state-sponsored violence. For example, in the later part of the seventeenth century, England’s citizens militias were coming under increasing criticism for their numerous weaknesses—including disorganization, poor leadership, and outdated tactics and weaponry. All of these defects could in some way be traced back to the militia’s extreme decentralization. There were 52 autonomous county militias. These critiques were being leveled while continental powers (in particular, France) were centralizing military power by organizing standing armies in response to changes in military technology and tactics (e.g., the rise of firearms and the consequent changes in military formations to take advantage of this technology). Political pamphleteers in England argued that survival would require an organizational innovation—that is, a standing army. Adaptations such as these, however, will have an influence on the state’s comparative advantage of violence and hence its ability to credibly commit. Concomitant changes may have to take place in the political arena if credibility is to be restored. Necessarily, there may be a link between changes in military technology and constitutional innovations.
In general, understanding the process by which organized violence becomes organized and the factors that influence this process gives us a glimpse into the font of state power and also a glimpse into the ways in which we can tweak said power toward creating credibility.
Unorganized violence destabilizes property rights, strips individuals of their current wealth and property, and creates an incentive for community members to redirect their efforts from productive growth-augmenting endeavors— for example, specialization and trade—into predatory and/or protective activities. Necessarily, the task set before a community is finding a way to self-regulate the use of violence within its boundaries. If there is an opportunity for mutually beneficial interactions, then individuals will be motivated to take the costly steps to make it happen. In other words, there will be a demand for some rules to govern the use of violence. It is the supply, monitoring, and enforcement of rules that are the fundamental hurdles to the emergence of these rules. A key variable is the willingness and ability of each community member to commit to be bound by the rules. The supply of rules, even under the best conditions (one agent is willing and able to finance the cost of supplying the rules), will be in vain if their commitments lack credibility. The likelihood of accomplishing this task is pretty good when the community is small, homogeneous, and characterized by repeated interactions.
These traits, however, are the very opposite of those traits that characterize a commercial society and form the bedrock of economic prosperity—namely, large numbers, heterogeneous population, a high degree of specialization, and complex trade across space and time. Necessarily, the new task set before the community is to allow for the emergence of an accountable, honest, and responsible individual or group of individuals into whose hands violence is centralized (i.e., organized). It is the state that is usually tasked with providing protection services. Indeed, the value of the third party lies in its willingness and ability to enforce the rules and thereby allow community members to credibly commit to recognizing and respecting each other’s property rights. However, in this arrangement, the inability to credibly commit is simply transferred from constituents to the third party. Prospective constituents are aware of this dilemma and will be resistant to monopolizing violence within the third party until they settle upon and introduce mechanisms by which the third party can credibly commit. Until that time, they will forgo the benefits that attend economic prosperity.
The third party’s ability to renege and predate is fundamentally a function of his or her violence potential relative to that of his or her constituents. A credible commitment can be engineered by manipulating this power differential through choosing an organization of violence that increases the third party’s costs of coordinating and motivating the resources that are set aside for violence (labor, tools, and entrepreneurial spirit). Yet, herein lies a tension. Choosing an organization of violence that is too decentralized, while yielding a credible commitment, makes the third party too weak and may invite insurrection and/or invasion. Choosing an organization of violence that is too centralized, while efficient, makes the third party a threat. A solution to this dilemma requires a constitutional innovation (e.g., Article VI) designed to simultaneously provide for defense while protecting property rights. For example, settle upon a relatively more centralized organization of violence (signal strength to rivals within and outside)—but invest the decision to deploy violence into the hands of political veto players (signal impotence to constituents). Both require manipulating the number, character, and composition of those who have access to violence and those who have a voice in the political arena. Settling upon a particular number, character, and composition in each arena is shaped not only by the dynamic interaction between the third party and constituents but among the third party, his or her constituents, and rivals inside and outside the state.
Successfully managing the credible commitment dilemma, structuring a self-enforcing politico-military settlement, is pivotal to secure property rights. Therefore, truly ascertaining the conditions that underlie economic prosperity requires us to ask the following questions: How do political economies, in response to their strategic environment, organize organized violence, and what are the ramifying consequences of their choices? In particular, how do the number, character, and composition of those who have access to violence change in response to a political economy’s strategic environment? And, in turn, how do these changes influence the number, character, and composition of those with decision-making authority over a political economy’s organization of violence?
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