June 23, 2023
Markets predated states.
“In the beginning, were markets,” says Oliver Williamson.
Where, then, did states come from? There has been less thinking on this question than it warrants.
Public Choice economics developed a “politics-as-exchange” framework for analyzing political actors. With an emphasis on “exchange,” the important concept of transaction costs couldn’t be far behind. To my way of thinking, it’s surprising transaction costs weren’t explicit sooner. But thankfully, Randy Holcombe has an interesting piece in the Independent Review which enriches political exchange by incorporating transaction costs.
Holcombe’s opening lines advance an idea that I believe could be applied beyond the purview of his paper:
“If there are no transaction costs, people who value resources the most will engage in mutually advantageous exchange to maximize the value of resources under their control. This holds true in political transactions as well as in market transactions. In the political marketplace, some people are in a low-transaction-cost group and can bargain with each other to produce policy outcomes that maximize the value of resources to those in the group. Most people face high transaction costs in the political marketplace and are unable to participate in those transactions. Policies implemented by those in the low-transaction-cost group—the people who design public policy—are not necessarily the ones that maximize the value of resources to those in the high-transaction-cost group.
A transaction-cost approach to public-policy analysis shows why some are systematically able to enact policies that benefit themselves, often at the expense of others.”
In a nutshell: People that, for whatever reason, face lower transaction costs of organizing are able to enact policies that exploit high transaction cost groups (who, because of high transaction costs, can’t easily organize to resist exploitative policies).
Holcombe again:
“A transaction-cost approach to public-policy analysis shows why some—the elite—are systematically able to enact policies that benefit themselves, often at the expense of others. In the context of the Coase theorem, the elite are those who face low transaction costs in the negotiations that determine public policy and so are able to bargain among themselves to maximize the value of public policies to members of the low-transaction-cost group.”
Holcombe’s paper is about policies enacted by states.
But why not apply this compelling logic to the very formation of the state? Such a framework would posit something like the following: States often emerge when a low-transaction group is able to effectively compel taxation from a high-transaction cost group within the confines of a geographic region. A natural follow-up set of questions would explore the conditions that increase or decrease said transaction costs. This framework needn’t explain every instance of state emergence to be valuable (what does?).
To theories of state formation that already rely on transaction cost reasoning, Holcombe’s framework could push back on the presumption that states arise merely to rectify the Hobbesian jungle. To theories of state formation that already emphasize exploitation, coercion, and aggression, Holcombe’s framework could introduce much-needed transaction-cost microfoundations.