The Economic Foundations of Government.

One of the most notable attributes of good economic analysis is its reductionism. Critics ridicule the abstract, even minimalistic, approach economists take to the study of human behavior and policy phenomena. But parsimony can clearly be defended if the resulting theory is broadly consistent with observation and at least some of the predictions of the theory are surprising.

Holcombe takes an extraordinarily reductionist approach in this book, but pulls it off well. The main thesis of the book is that all the institutional trappings we associate with government, and constitutions, can in all important respects be understood as the outcome of a bargaining process. In contrast to Buchanan, Nozick, Rawls, or other contractarian theorists, Holcombe dismisses the twins notions of the "veil of ignorance" and the requirement of equality of bargaining strength to validate agreements. Holcombe might best be characterized as a neo-Hobbesian, though with the key distinction that Holcombe is led to his conclusions by the extended application of the economic theory of exchange.

The primary exchange that gives birth to government is, in Holcombe's view, trading protection for tribute. If there are just two people, one strong and one weak, the exchange of protection for tribute is clearly extortionary. Holcombe develops the idea that as the number of weak people grows, and as the strong become institutionalized within a set of rules that limit extortion while maintaining government's capacity to exercise coercion, the exchange may become much less extortionary. In fact, the existence of a powerful (and dangerous) government may be Pareto-preferred to a Hobbesian state of nature by the masses of the weak. The basis of the "right" to govern here is not natural law, or consent of the governed, but rather lies starkly in the power of government to coerce: government rules because it can. The institution of government is an equilibrium arrangement in societies only when the citizens accept this rule as having some value in the protection for tribute exchange, but there is no normative basis in Holcombe's theory for the social contract. Consequently, the "contract" is nothing more than an agreement, and citizens benefit from the existence of the agreement notwithstanding government's inherent advantages in the use of coercive power.

The organization of the book is logical, and cumulative. After defining rights and describing the limited, purely positive sense in which he will use the notion of "social contract," Holcombe considers several limitations on the power of government. He distinguishes between the theory of clubs and his theory of government, noting that the definition of "government" is difficult. Each citizen finds himself party to an enormous number of explicit and implicit agreements; which of these are "government?" Again, Holcombe gives a limited definition, minimizing the set of activities government accounts for. His definition of government is "an organization that has the ability to finance its activities by compulsory contributions from all individuals in a given geographic area."

Finally, Holcombe considers the related topics of competition for the control of government, and the evolution of constitutions, and concludes by offering observations on the normative implications of the theory. One of the nicest observations he is able to make is on the pervasiveness of the democratic form of decision-making. Rather than satisfying a Rawlsian conception of fairness as a primitive concept, as a way to satisfy voters, Holcombe argues that democracy is widely observed because it benefits government! Though government rules simply because it can, there are substantial Pareto improvements to be realized through cooperation and economic growth. Democracy imbues policy with legitimacy: even those opposed to current policies recognize that the basis of those policies is not capricious, but is the expressed will of the majority of citizens. The tension between achieving legitimacy and maintaining control is, in Holcombe's view, the essential feature of modern government that must be understood before we can analyze legislative or electoral institutions effectively.

Michael C. Munger University of North Carolina-Chapel Hill