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The Economic Foundations of Government.

This is an interesting, if flawed, book, another of the genre of books that look at government through the lens of microeconomic theory. (The author is an economics professor.) Partly, it has the feel of a brief text, presenting yet again a public choice perspective on big questions such as the origins and nature of government. It has, however, a number of original and intriguing ideas as well.

Although Holcombe's book covers a range of topics, the basic ground it covers is relatively straightforward. Government arises as a trade--"protection for tribute." People pay governments money in exchange for physical and economic security. Once governments come into existence, however, they are able to act like the monopolies they are--selling protective services at monopoly prices and, more importantly, producing goods other than protection and selling them at monopoly prices, "in a manner similar to the way in which monopolists might try tie-in sales, all-or-nothing sales, price discrimination, and so forth to enhance their profits."

Holcombe's account of government as a trade of protection for tribute represents a significant addition to the literature analyzing the Hobbesian model. One question that has been raised recently in this literature is why the strong would have any interest in participating in a social contract: Wouldn't they be better off stealing from the weak? The point of this criticism is to suggest that one cannot justify the development of government strictly from a contractual perspective of agreement among self-interested parties without referring to substantive ethical concepts (e.g., the immorality of theft) to justify government as arising to enforce a moral vision going beyond an agreement among the self-interested. Hobbes had an answer for the criticism that the strong would be better off without a social contract, suggesting that even the weak might kill the strong. Holcombe has a more convincing answer. He argues that without some agreement setting clear bounds on the "tribute" that the weak must pay the strong, the weak will have no incentive to produce anything (because all of it is subject to theft), and the strong will be worse off than if they agree to limit the tribute they take, since they will get a larger proportion of a much smaller pie. (As an aside, Holcombe notes that a weakness of the libertarian suggestion that "taxation is theft" is that taxation is predictable, while theft is not, so that the productivity-depressing consequences of taxation are fewer.) In Holcombe's social contract, disparity in initial bargaining power affects the results of the contract: the strong come out better than the weak. But both sides are better off, and the trade occurs. Thus, no appeal to morality is necessary to produce government.

One quick (and I hope not unfair) reaction to Holcombe's clever argument is that if it took a bunch of smart social scientists until 1994 to develop this argument about why the strong will realize that it is in their interest to tax instead of steal, it is questionable whether the prehistoric strong would have all been so smart. There are certainly elements of Holcombe's argument that have a ring of plausibility. Indeed, they bear some resemblance to the emergence of feudalism in medieval Europe. However, the feudal lords who bestowed protection in exchange for tribute were, so to speak, protection specialists who were protecting the weak against potential threats from many who apparently did not realize that the weak would be more productive if only no efforts were made to steal from them. That does not get us to a social contract agreed to by the strong as well as the weak. If one is to justify this arrangement, there is still no way of escaping a moral judgment about the behavior of potential thieves.

Holcombe's argument about government as monopolist is also intriguing but likewise flawed. Government's monopoly over protective services creates the opportunity for government to extract monopoly profits. Although Holcombe never states this explicitly, his view (consistent with the ideology of most public choice scholars) seems to be that essentially everything government does beside providing protection (everything from farm subsidies to antipoverty programs) involves government extraction of monopoly profits from citizens through a tie-in deal whereby they are forced to support such programs as a condition for receiving protection from theft. If government can exploit its monopoly position, those who hold power may use it either to adopt special-interest legislation or to vote their ideological convictions about good public policy without worrying about electoral defeat (actions Holcombe appears to regard as essentially equivalent from his analytic perspective).

Government's ability to act as a monopolist, Holcombe argues, is restrained in the same ways that monopoly power is restrained in the private economy--through competition among units vying to be our government. This may take the form of Tieboutian competition among local governments, based on individual mobility, for attracting and holding residents. Or it may take the form of democratic electoral competition in any one government, keeping in mind Harold Demsetz's insight that in the course of competition for the right to be a monopolist, monopoly profits will be competed away.

As a result of his view that competitive forces are crucial to reduce government monopoly profits, Holcombe emphasizes "barriers to entry" that make it more difficult for these competitive forces to operate. For example, Holcombe argues that barriers making it easier for incumbents to be reelected and increase government monopoly profits. He also presents the view that the oft-noted expansion of the role of government in connection with wars results from the decline in inter-nation population mobility in connection with wars, which increases government monopoly power by short-circuiting the Tieboutian mechanism.

Holcombe's whole analogy of non-protection-related government programs to monopoly profits is, however, incomplete. Partly, there are some technical problems with the analogy, since the putative monopolist (elected officials) would seem to be interested in gaining a monopoly (i.e., assured reelection) for its own sake or for reasons not relating to extracting monopoly profits from citizens (e.g., simply enjoying the power to make decisions), rather than, as with a normal monopolist, for the sake of its instrumentality in extracting monopoly profits from customers. More importantly, in Holcombe's view, government expansion arises only from the activities of special interest groups or through the personal ideological agendas of elected officials. This ignores the fact that electoral competition is itself a major reason government has taken on new roles. The majority, Holcombe suggests (though he never specifically states), would never go along with a government that provided more than protection. Hence, any such government must reflect monopoly profits. Holcombe's bizarre suggestion that government expansion in the wake of world wars reflected reduced international mobility ignores not only such obvious alternative explanations as the effects of war on national debt, postwar military spending, and benefits for soldiers but also the impact of wars on the climate of ideas in the postwar eras.

Now, from a libertarian moral perspective (including James Buchanan's view that government policies should be required to elicit unanimous support), the fact that government has taken on these roles may be morally unacceptable. Holcombe, however, seems to want to use a majoritarian framework to make what is probably in fact a libertarian, minority-rights point about the expansion of government. That will not work.

There is a final observation about this kind of economic analysis applied to government. On the one hand, the use of economic models can provide valuable insights and new ways of thinking (e.g., seeing incumbency advantages as analogous to economic barriers to entry that increase the ability to exact monopoly profits). On the other hand, the danger of reductionism is that when one phenomenon (politics) is reduced to another (economics), important features of the phenomenon being reduced can get lost. The basic metaphor of government as a marketlike arena for self-interested exchanges, where normative considerations play no role, is an example of the dangers of reductionism. Political scientists must resist efforts to reduce politics to economics.

STEVEN KELMAN Harvard University and U.S. Office of Management and Budget
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Author:Kelman, Steven
Publication:American Political Science Review
Article Type:Book Review
Date:Dec 1, 1994
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