The Underbelly of State Capacity
By Bryan Caplan
Here are some highlights from Johnson and Koyama’s “States and Economic Growth: Capacity and Constraints” (Explorations in Economic History, 2017). Remember: Since this piece is a literature review, you should continue to take my critical remarks as a criticism of the literature, not as a criticism of my esteemed colleagues.
1. How do researchers actually measure state capacity? One of the most common measures is simply per-capita taxes.
Recent work by Besley and Persson (2011) has drawn attention to an important correlation between per capita GDP and measures of state capacity, usually defined as per capita tax revenues. This positive correlation is robust and holds over a wide range of definitions of ‘state strength’.
High per-capita taxes plainly indicates capacity for collecting a lot of taxes; after all, you can’t do stuff beyond your capacity. But isn’t the whole point of this literature that a low-tax state could still have very high capacity? The standard claim, after all, is that you want a “strong but limited” state: One that’s capable of great things if and when they’re needed.
So what? Well, if you believe that per-capita taxes genuinely cause growth, you’ve effectively switched to the simpler theory that big government is good for growth. State capacity then becomes a red herring. If you object, “Perhaps it’s politically easier to have high taxes in a rich country, so prosperity causes taxes rather than the other way around” you should also be worried about reverse causation from prosperity to state capacity.
2. North and Weingast famously argued that the Glorious Revolution established a strong but limited government, paving the way for the Industrial Revolution. Johnson and Koyama point readers to a long list of challenges to North-Weingast:
North and Weingast (1989) saw 1688 as making a constitutional watermark leading to the better protection of property rights and the rule of law. Subsequent research has overturned many aspects of this thesis. In the century and a half following 1688, rules and laws did become more general. But the process was saw numerous setbacks. Although as Brewer (1988) documented, the excise was modernized and bureaucratized in the period following 1688, the rest of the British state remained patrimonial in organization and modernization was a slow and gradual process–an open examination for entrance into the civil service was only introduced in 1870. In the sphere of business organization, the ability to form joint-stock companies was severely limited by the Bubble Act of 1720 and incorporation laws only began to be liberalized in the 1820s with the full legalization of joint-stock companies waiting until 1844 (Harris, 2000).
3. What’s up with China?
[R]ecent scholarship has established that taxes in China were low (Ma, 2011, 2012, 2013; Rosenthal and Wong, 2011; Sng, 2014; Vries, 2015; Ma and Rubin, 2016). This had positive effects as the policies of the Qing state did not impede the effectiveness of the market in goods and services (Pomeranz, 2000; Shiue and Keller, 2007; Li et al., 2013). However, many aspects of the effectiveness of the Chinese state in the early modern period remain subject to debate. It is a matter of some contention whether or not the low taxes collected by the Chinese state reflected low fiscal capacity or a reliance on Confucian ideology. Kent Deng refers to ‘under governance’ in terms of the reigning political ideology observing that ‘[h]]eavy taxation remained politically taboo’ (Deng, 2015, p. 328). Rosenthal and Wong (2011) write that the ‘Chinese logic for successful state maintenance … emphasized light taxation and generally tried to avoid interfering with commerce’ (174). Sng (2014), on the other hand, compellingly argues that the low amounts of tax revenue collected by the central government in Qing China reflect the fragile political equilibrium that the Qing rulers faced in governing such a large empire using premodern technology. The Qing state relied on a land tax based on a fixed amount due each year based on the value of land. The collection of this tax gave a large amount of discretion to the local officials who extracted bribes or otherwise manipulated the process for their own benefit. Sng (2014) develops a formal model which predicts that where the principal-agent problem facing the ruler was more severe, the weaker was the ruler’s ability to tax. Consistent with this model, he presents evidence that taxes were significantly lower in areas further from the capital and that they declined significantly from the mid-eighteenth century onwards. Vries (2015) similarly interprets the low taxes collected by the Qing state as reflective of a low-state capacity political equilibrium.
4. Here’s a seemingly unobjectionable comment on China versus Japan.
Japan also ceased to face geopolitical competition after pacification at the end of the sixteenth century and as a result there was little incentive to build a fiscal-military state during the early modern period. However, unlike China, Japan was able to centralized its governing institutions and invest in fiscal capacity once it awoke to the threat posed by the West in the mid-nineteenth century.
What’s the problem? Sleight of hand, again. The fact that Japan “centralized its governing institutions and invested in fiscal capacity” shows that Japan was able to do so. But it does not show that China was unable to do so – merely that it did not. Organizations fail to do all sorts of things of which they are capable.
P.S. Bardhan’s “State and Development” (Journal of Economic Literature, 2015) is a good complement to Johnson and Koyama. Most notably, they question even more of the North-Weingast narrative:
Historically, however, England has indeed been a successful case where political centralization and pluralism have fit together. But, contrary to North, Weingast, Acemoglu, and Robinson, economic historians like Epstein (2000), Clark (2007), and Allen (2009) have expressed doubts if the economic success of England can be mostly attributed to the constitutional changes that came with the Glorious Revolution. Even some of the more recent defenders of North and Weingast, like Cox (2012) and Pincus and Robinson (2011), agree that neither cost of capital nor enforcement of property rights improved significantly after that Revolution, even though it represents an important constitutional watershed (Cox) or an institutional change shifting the balance of power from the king to the new manufacturing classes (Pincus and Robinson).