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What is the role of the state?

August 8, 2010 8:09pm |Share

It is summer - a good time to ask a big question. So I intend to ask the biggest question in political economy: what is the role of the state? This question has concerned western thinkers at least since Plato (5th-4th century BCE). It has also concerned thinkers in other cultural traditions: Confucius (6th5th century BCE); Chinas legalist tradition; and Indias Kautilya (4th-3rd century BCE). The perspective here is that of the contemporary democratic west. The core purpose of the state is protection. This view would be shared by everybody, except anarchists, who believe that the protective role of the state is unnecessary or, more precisely, that people can rely on purely voluntary arrangements. Most people accept that protection against predators, both external and internal, is a natural monopoly: the presence of more than one such organisation within a given territory is a recipe for unbridled lawlessness, civil war, or both. Contemporary Somalia shows the horrors that can befall a stateless society. Yet horrors can also befall a society with an over-mighty state. It is evident, because it is the story of post-tribal humanity that the powers of the state can be abused for the benefit of those who control it. In his final book, Power and Prosperity, the late Mancur Olson argued that the state was a stationary bandit. A stationary bandit is better than a roving bandit, because the latter has no interest in developing the economy, while the former does. But it may not be much better, because those who control the state will seek to extract the surplus over subsistence generated by those under their control. In the contemporary west, there are three protections against undue exploitation by the stationary bandit: exit, voice (on the first two of these, see this on Albert Hirschman) and restraint. By exit, I mean the possibility of escaping from the control of a given jurisdiction, by emigration, capital flight or some form of market exchange. By voice, I mean a degree of control over, the state, most obviously by voting. By restraint, I mean independent courts, division of powers, federalism and entrenched rights.

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What is the role of the state? | Martin Wolf's Exchange | FT.com

This, then, is a brief background to what I consider to be the problem, which is defining what a democratic state, viewed precisely as such a constrained protective arrangement, is entitled to do. My short answer is that this is precisely what politics must be about. There exists a strand in classical liberal or, in contemporary US parlance, libertarian thought which believes the answer is to define the role of the state so narrowly and the rights of individuals so broadly that many political choices (the income tax or universal health care, for example) would be ruled out a priori. In other words, it seeks to abolish much of politics through constitutional restraints. I view this as a hopeless strategy, both intellectually and politically. It is hopeless intellectually, because the values people hold are many and divergent and some of these values do not merely allow, but demand, government protection of weak, vulnerable or unfortunate people. Moreover, such values are not wrong. The reality is that people hold many, often incompatible, core values. Libertarians argue that the only relevant wrong is coercion by the state. Others disagree and are entitled to do so. It is hopeless politically, because democracy necessitates debate among widely divergent opinions. Trying to rule out a vast range of values from the political sphere by constitutional means will fail. Under enough pressure, the constitution itself will be changed, via amendment or reinterpretation. So what ought the protective role of the state to include? Again, in such a discussion, classical liberals would argue for the night-watchman role. The governments responsibilities are limited to protecting individuals from coercion, fraud and theft and to defending the country from foreign aggression. Yet once one has accepted the legitimacy of using coercion (taxation) to provide the goods listed above, there is no reason in principle why one should not accept it for the provision of other goods that cannot be provided as well, or at all, by nonpolitical means. Those other measures would include addressing a range of externalities (e.g. pollution), providing information and supplying insurance against otherwise uninsurable risks, such as unemployment, spousal abandonment and so forth. The subsidisation or public provision of childcare and education is a way to promote equality of opportunity. The subsidisation or public provision of health insurance is a way to preserve life, unquestionably one of the purposes of the state. Safety standards are a way to protect people against the carelessness or malevolence of others or (more controversially) themselves. All these, then, are legitimate protective measures. The more complex the society and economy, the greater the range of the protections that will be sought. What, then, are the objections to such actions? The answers might be: the proposed measures are ineffective, compared with what would happen in the absence of state intervention; the measures are unaffordable and might lead to state bankruptcy; the measures encourage irresponsible behaviour; and, at the limit, the measures restrict individual autonomy to an unacceptable degree. These are all, we should note, questions of consequences. Elsewhere on ft.com
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http://blogs.ft.com/martin-wolf-exchange/2010/08/08/what-is-the-role-of-the-state/[09/08/2010 12:33:54]

What is the role of the state? | Martin Wolf's Exchange | FT.com

The vote is more evenly distributed than wealth and income. Thus, one would expect the tenor of democratic policymaking to be redistributive and so, indeed, it is. Those with wealth and income to protect will then make political power expensive to acquire and encourage potential supporters to focus on common enemies (inside and outside the country) and on cultural values. The more unequal are incomes and wealth and the more determined are the haves to avoid being compelled to support the have-nots, the more politics will take on such characteristics. What are my personal views on how far the protective role of the state should go? In the 1970s, the view that democracy would collapse under the weight of its excessive promises seemed to me disturbingly true. I am no longer convinced of this: as Adam Smith said, There is a great deal of ruin in a nation. Moreover, the capacity for learning by democracies is greater than I had realised. The conservative movements of the 1980s were part of that learning. But they went too far in their confidence in market arrangements and their indifference to the social and political consequences of inequality. I would support state pensions, statefunded health insurance and state regulation of environmental and other externalities. I am happy to debate details. The ancient Athenians called someone who had a purely private life idiotes. This is, of course, the origin of our word idiot. Individual liberty does indeed matter. But it is not the only thing that matters. The market is a remarkable social institution. But it is far from perfect. Democratic politics can be destructive. But it is much better than the alternatives. Each of us has an obligation, as a citizen, to make politics work as well as he (or she) can and to embrace the debate over a wide range of difficult choices that this entails.
August 8, 2010 8:09pm in Economics, The state | 31 comments

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Sorted by oldest first | Sort by newest first Malcolm Ramsay | August 8 11:37pm | Permalink

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"The core purpose of the state is protection. This view would be shared by everybody, except anarchists ..." I wouldn't say I'm an anarchist but I've heard this view before, and it doesn't seem right to me; the state's core purpose, to my mind, is provision of a basic framework which allows individuals to identify with the group. Without that, there can't be any concept of protection against external threats (because there would be no sense of external/internal), nor would there be any group identification with the weak. In other words, it starts with the rules and processes by which *equals* resolve their differences - and that creates the context in which 'protection' has meaning. Malcolm Ramsay | August 9 12:17am | Permalink

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"Yet once one has accepted the legitimacy of using coercion (taxation) to provide the goods listed above, there is no reason in principle why one should not accept it for the provision of other goods that cannot be provided as well"

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What is the role of the state? | Martin Wolf's Exchange | FT.com

Isn't there a hierarchy of 'goods'? And isn't protection against violence very near the top? So how can it be proper for taxation (which rests on the state's monopoly of violence) to be used for *any* purpose which is less important than that? I know. That would probably cut out ninety percent of what governments do, much of which is clearly beneficial. But how much of what they do is merely mitigating the ill effects of fundamental laws (e.g. land ownership) and deeply entrenched government 'actions' (e.g. a medium of exchange which can be taken out of circulation by anybody who has a surplus)? 'First do no harm' seems to me to be a principle which should apply in every sphere - in government above all. Can there be a meaningful debate about what the state *should* do, without first agreeing on what it *shouldn't*? jbmopper | August 9 12:38am | Permalink

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Well, if we're going to harken back to the Athenians, we should refresh the idea that part of a democratic state's job is to develop its citizenry's virtue by encouraging their participation in self-rule. It seems like the IT revolution could enable more meaningful citizen participation, but of course, we Americans can't seem to do much of anything anymore, let alone make substantial changes to the way government works. A great deal of ruin, indeed. Lady Economist | August 9 1:47am | Permalink

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Health Care,Education,Law and Order,Defence and Security,Economic management,Social security and Pensions,Trade and Export help,Transport ETC sadly we don't live in the perfect world do we,The Athenians where invaded by the Spartans martin and had live under a dictatorship.So what is the best system.Democratic or dictatorships,Free market or centrally run. Francobollo | August 9 1:51am | Permalink

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I fully agree with Martin. My reading of Olson was that he saw democracy evolving from situations of power stalemate between the king (stationary bandit) and other powerful members or groups in society. But once established democracy was hard to dislodge because the incentives involved in democracy meant that less rent was extracted from society's members than under the stationary bandit. The libertarian analysis relies on the constitution (restraint) and exit and gives no value to 'voice'. But there is plenty of evidence that voice changes policy (consider the government volte-face on 'poll tax' in the 1980s). Offering exit as a protection is not much better than no protection at all, because exit comes at high cost for the individual. For politics to work well we need a good constitution (this has usually evolved in most longstanding democracies) but we must work harder to improve the mechanism of voice (tempered by constitutional restraint). Clearly the state has a role in addressing externalities and in providing services such as health and education, policing and defence where it enjoys economies of scale as provider. But it goes further than this. The key is the instability of the system. The current market system, while a far more efficient allocator of resources than a centralised state, drives ever-increasing inequality, which pushed to its limits must surely lead inexorably towards revolution and the collapse of the state, as has occurred in unequal societies in the past. Consider the UK today: nearly half of state spending is on transfers. This spending lifts many out of poverty. And yet even so inequality has not fallen over the last decade. Under the Conservative governments of 1979-97, inequality rose sharply. This shows the forceful effect of the market system, and if the state is to survive, it must continue to push against inequality. The other historical lesson of the market system is that it leads to increasing concentration of oligopoly power, the power of the multinational. For the individual, a well-designed state offers protection from exploitation by corporate power and the rich and powerful in society. The BBC is more benign than Sky. The media has an important role to play. And we need more openness. Individuals are entitled to privacy, but if that privacy is hiding things that matter to others in society (eg the bonus culture of the banking system, a flawed expense system for MPs, extreme wealth when others are extremely poor) that is not such a good thing. I understand that in Sweden it is legally possible for anyone to discover the income of any other member of society. The real problem for the state is that, faced with increasingly demanding individuals and increasingly powerful multinational corporations, companies and wealthy individuals who threaten to take their business and persons elsewhere, the state is much weaker than it used to be. zorkl55 | August 9 1:52am | Permalink Mr Wolf wrote: "I would support state pensions, state-funded health insurance and state regulation of environmental and other externalities. I am happy to debate details." And I would heartily agree that mutual protection is a key feature of a state's function. In an era in the US when so much risk has been transfered from institutions to the individual, the burden for health care, pensions, and environmental damage is beyond the ken of any individual. I would agree that it is precisely for these functions, burdens best shared by the community, that a state exists. And yes, let's debate the details. Not the broad strokes of the argument.

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What is the role of the state? | Martin Wolf's Exchange | FT.com Ian Gilbert | August 9 2:56am | Permalink
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All would be well with the protective nanny-state if only government employment attracted, retained, and were wholly staffed by educated liberals (the European definition, not the American mislabeling). But as the U.S. TV show "Laugh-In" succinctly put it 40 years ago: "And now, this word of advice from the federal government: Watch Out!" Enrique | August 9 3:11am | Permalink

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Traditionaly the State just meant the Administration of the private property of the King. Lands of the Kingdom were just the private properties of the Owner (called King) who lent for a rent to farmers part of that land or just used coercion so poorer individuals worked that land. Anarchists also want an State so they talk about self-management and self-sufficiency...but when the number of anarchists increases the result is the State. A group of Anarchists are just an State in miniature like any Community. The flag, the national anthem, Defense....all is just a large Coommunity with the means to defend its way of life. Those in the Community share an identiy but as in any Corporation there are members who want to leave and build another because they dont agree with the present managers. Others want to keep the Corporation but changing the manager and the mangament. The rule of the State is guaranteeing a pacific management of the Community preventing against those who cause stress, tension to the Community, or just want to destroy it. Enrique | August 9 3:12am | Permalink correction: "the role of the State" whatdoiknow | August 9 7:20am | Permalink

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Thomas Hobbes said it best, in the state of nature, sans the State life would be short, solitary, nasty and brutish. In positive vein, John Locke emphasised, the role of the State is to ensure, life, liberty and pursuit of happiness. Jeremy Bentham, yet another British liberal philosopher later on elaborated how the State has to promote, the greatest good of the greatest number. Unfortunately, the State throughout the ages has repeatedly fallen prey to men of power and wealth who have used it as an instrument of self-aggrandizement. Ongoing economic crisis is just one latest instance of this. Will we ever be able to devise fool-proof checks and balances to ensure the State serves the greatest number and not overlords them? Will the ingenuity of new checks always lag behind the craftiness of men of power (Frank-Dodd Act anyone)? Life may never entirely descend to Hobbesian state of nature, but very often in history existence for large masses has hovered close to being short, solitary, nasty and brutish. Somalia, Afghanistan and Iraq are a few contemporary examples of this; but the conditions of the destitute in the slums and ghettoes of even settled societies of developing and some developed world may be only marginally better. pietro.gussio | August 9 7:32am | Permalink I think we have built a so big infrastructure (the State) that our single voice can't be heard. To say that we can change things by voting is wrong, By voting we can change people not the 'infrastructure'. Since the State can't be reduced what we can do is to fix 'benchmark' in cost and procedures. Public hospitals, , transport etc etc must work fllwg the 'best practices' we can find in the market either private or public. To minimize cost and taxes. ecopgh | August 9 7:43am | Permalink

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Yes, I like the general approach taken here; a good start to an important discussion. There are lots of things to say, but for now I'll just make two points: (1) Take a look at the fascinating book by North et al published last year, Violence and Social Orders. (2) To make the discussion more concrete think of a specific function that we expect the state to perform for us, such as protection of property rights (part of creating conditions under which private sector activity can flourish). The difficulty here, as always, is that we expect the state to protect us against predation by other private agents (theft, cheating, fraud, and the like), but any state that is strong enough to do this reliably is clearly strong enough to engage in predation itself. So what we seem to want is a strong state and a state with limited/constrained powers. Hence it's worth asking, under what conditions is this even possible? If we look around the world there are rather few places that can claim fully to meet such conditions. It's not easy to devise suitable constitutional arrangements and make them credibly sustainable. Martin Wolf | August 9 8:24am | Permalink

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@ Ian Gilbert, government is imperfect and markets are imperfect. The debate over which is more or less imperfect in remedying any specific ill (and I do tend to see the aim of policy as harm-reduction) is the core

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What is the role of the state? | Martin Wolf's Exchange | FT.com of any reasonable political debate. The evidence is overwhelming, for example, that state-financed, but not state-provided, healthcare systems are far cheaper and far more effective than the competitive private feefor-service cum insurance model of the US. Martin Wolf | August 9 8:28am | Permalink

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@ ecopgh, Yes, it is clearly correct that state power can be abused. But the absence of all state power is a catastrophe: think Dark Ages. Hobbes was surely right on this. I would argue that universal suffrage democracy, constitutional entrenchment and exit are necessary and sufficient to achieve adequate checks on state power. This was the view of Mancur Olson and also of North. (I have written columns recently about North's thinking. David Goldsby | August 9 8:45am | Permalink

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The first question of the moment, as far as England is concerned, 'Can it be a legitimate role of the state to voluntarily give away its sovereignty without the express agreement of an overwhelming majority of its people?'. The second, 'What exactly does Peter Mandelson mean by, "We have entered the Post Democratic Age", when clearly the people have never, and would never, vote for that? Martin Wolf | August 9 8:58am | Permalink

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@ Malcolm Ramsay, I think you have it partly the wrong way round. The state's protective umbrella often creates the identification, not the other way round. There was England before there were the English, France before there were the French and the United States before there were Americans. Sooner or later a successful state creates a quasi-tribe. Of course, there are exceptions. People decided they were Germans before Germany was created. I would argue that this was in imitation of the successful nation states of Europe (particularly France) and, in part, as protection against them. But in this discussion I have not addressed the question of how states are formed, but of what they are for. I agree that they are likely to be more effective, on all dimensions, if the people they embrace identify strongly with one another. That is one reason why patriotism (and its ugly twin, nationalism) are such powerful political forces, for good and ill. Martin Wolf | August 9 9:00am | Permalink

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@ David Goldsby, I think the answer to your question is: no. This relates to the question of state formation and dissolution, not its functions. But it seems to me to be clear that the state does not belong to its political elite and cannot be given away by it, without consent of the people. Martin Wolf | August 9 9:03am | Permalink @ zorkl55, I agree entirely. john2010bon | August 9 9:13am | Permalink The three governments (a soundbite) You may have noticed that the government (any government) has a 'moral dilemma' trying to manage three separate spheres of human activity:- the economics, politics and cultural. The three aspects should be separated into three autonomous governments:1 The Rights Government This is the realm of the politician, administering the rights and duties of everybody. Everyone would have an input into this and parties and elections etc. be as they are now. One of the main functions of the rights government would be setting the remuneration for everyone, so that the 'sale of labour' is abolished as only commodities can have value. So what are currently the unions would be in the rights sphere, as the politicians that they are. The value of intelligence and creativity, and the labour of the individual cannot be compared with a commodity, even though we have become used to the idea since the division of labour some time ago. There are other consequences for the use of land and agriculture on a 'use' basis, but for this short 'soundbite' would take us too far. 2 The 'Cultural Government The main areas concerned here are the education and health realms. These must be run by those who actually currently practice in the field (not 'used to' practice/teach) so that hospitals and health providers would be administered by medical professionals and schools by education professionals (doctors and teachers to you) in the actual situation, so each individual hospital and school would be managed by its own people in their particular situation. Similarly the arts and all 'cultural' programs.

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What is the role of the state? | Martin Wolf's Exchange | FT.com

/cont... 3 The economic government This would be managed by a 'CBI' (extended Confederation of British Industry) in the initial instance until the economic realm decided how to appoint directors for the economic realm. Under this directorship (CBI for short) would be the current Treasury and HMRC, the inland revenue and customs. The 'CBI' would then run the economy on competition and trust/brotherhood lines, moderated by associations of producers, traders and consumers. The main source of taxation would be though investment money, so that (for instance) the 0.5% stamp duty on share purchase could become 10%. For example, income tax, and the whole god-forsaken paraphernalia that goes with it, could be abolished, and many the tax-planners, tax-lawyers etc. etc. could all go into productive employment. To encourage this form of taxation through investment, the value of money could be time-constrained, so that, for example, a 2020 20 note issued today would expire, have no value, on say, 8th September 2020. The three-cornered 'house'. Thus, the three governments would meet to thrash out on an ongoing basis (as society and its needs moves on all the time) the transfer of money from the economic government to the cultural government and the necessary funding to support the rights government. The health of the economy, education and general population would be thereby vastly improved as the selfesteem and value of each person is recognised at its full worth. The time-constrained money would ensure that the products of human endeavour are quickly reinvested into the producing economy and building piles of 'dead money' would disappear and pensions etc. paid out of the vibrant economy on a needs (or similar) basis. (Who really needs a pension of 200,000 a year??). **** brazilamaral | August 9 9:31am | Permalink Martin Wolf asked the question: What is the role of the state? It is my understanding that our modern notion of the role of the state started in France at the time around the French Revolution. The French Revolution was a major turning point in world history, and that was the revolution that changed the world. What is the role of the state? What is the number one priority? Most people would say it is defense of the country against foreign invasion of any kind. One hundred years ago we had the saying the sun never goes down on the British Empire because at that time we had 25 percent of mankind under British domination. What happened to such a powerful empire? That Empire was not beaten on the battlefield by another country. That empire imploded death by taxes at the end of the day someone had to pay the bills for the British adventurers around the world. Here is another example: the Soviet Empire. In the case of the Soviets as well a long term of over spending on military expenses also placed the Soviet Union on the poor house. Did Americans learn a lesson from past history? No, Americans have adopted the same path into extinction. Here is just a reminder on the road to extinction: It is a very sad state of affairs - Living on borrowed money from foreigners and at the same time thinking that they are very wealthy. Since George W. Bush became president on January 20, 2001 to the day when he ended his 2nd term, the US government added to its outstanding debt $ 5 trillion dollars. It is no coincidence, but as you can see by the enclosed actual figures the total adjusted amount of US defense spending during the 8-years of the Bush administration was over US$ 4 trillion dollar. My question is: for how many more years do you think foreigners are going to continue funding the defense spending of the United States? Never mind foreigners funding American military adventures around the world who is going to fund all the trillions and trillions of dollars of US domestic expenses that are coming due very fast from now on

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What is the role of the state? | Martin Wolf's Exchange | FT.com liabilities related to the Baby Boom generation? The Soviet Union economic system collapsed around 1990. The US capitalist system collapsed in 2008. Today China is reinventing a new economic and social system for its people. I have no idea what the world is going to look like in 20 years when you take in consideration that the largest economy in the world today for all practical purposes is on a imploding mode and it will become less and less important over the coming years in terms of the total global economy. We have passed the point of no return, and I dont care about anybody say That is the real truth for the US economy. On top of all the problems that we already had related to the US economy, what happened in the last 3 years when Wall Street had to be bailout from its massive bets that went sour to the tune of trillions of US dollars, plus incompetence in the US financial markets that are mind boggling to me there is only one word that comes to mind when I think about the future of the US economy: Titanic. In 2004 I read with interest the book by Immanuel Todd After the Empire - The Breakdown of the American Order. Six years later the sinking of the Titanic is right on schedule. After reading the book by Nomi Prins It Takes a Pillage published in October 2009 then one understands the magnitude of the Wall Street bailout basically the last nail on the coffin of the US economy. If you want further information about how Wall Street is laughing all the way to the bank at the expense of American taxpayers, and how Wall Street went back to business as usual then you should read the latest article by Matt Taibbi on Rolling Stone magazine Wall Street Big Win. ( http://www.rolling.../news/17390/188551 ) Anyway, all I can say is that during the coming financial and economic collapse we are not going to have the safety net of the US government anymore. This time around we are going to go down to hell in a hand basket with the compliments of an incompetent US government and all the welfare programs that the US taxpayer is giving to Wall Street. *** As of Date - US Government Total Public Debt Outstanding 05/07/2009 01/16/2009 09/30/2008 09/28/2007 09/30/2006 09/30/2005 09/30/2004 09/30/2003 09/30/2002 09/30/2001 01/19/2001 $11,256,266,640,050.20 $10,628,881,485,510.23 $10,024,724,896,912.49 $9,007,653,372,262.48 $8,506,973,899,215.23 $7,932,709,661,723.50 $7,379,052,696,330.32 $6,783,231,062,743.62 $6,228,235,965,597.16 $5,807,463,412,200.06 $5,727,776,738,304.64

Total public debt outstanding on 01/19/2001 was $5,727,776,738,304.64 and since George W. Bush became president on January 20, 2001 the US government added to its outstanding debt $ 5 trillion dollars. http://www.treasur...gin?application=np ***** United States government actual budget figures during the 8-year Bush administration. United States Government Annual Budget during the Bush administration. Each year, on the first Monday in February, the President of the United States submits his budget request to Congress for the following fiscal year: United States United States United States United States United States United States United States United States federal budget, federal budget, federal budget, federal budget, federal budget, federal budget, federal budget, federal budget, 2009 - $3.0 2008 - $2.9 2007 - $2.8 2006 - $2.6 2005 - $2.4 2004 - $2.2 2003 - $2.1 2002 - $2.0 trillion trillion trillion trillion trillion trillion trillion trillion (submitted (submitted (submitted (submitted (submitted (submitted (submitted (submitted 2008 by President Bush) 2007 by President Bush) 2006 by President Bush) 2005 by President Bush) 2004 by President Bush) 2003 by President Bush) 2002 by President Bush) 2001 by President Bush)

Total US government Budget for period year 2001 to year 2008 = US$ 20 trillion. The cumulative total actual US Government budget for the 8-year period of the Bush administration was US$ 20 trillion dollars. ************** Here is Bushes actual military spending - this does not include ANY costs related to Afghanistan or Iraq as they are all in supplemental spending bills: For Fiscal Year 2008 it is $481.4 billion For Fiscal Year 2007 it is $470.0 billion For Fiscal Year 2006 it was $441.6 billion

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What is the role of the state? | Martin Wolf's Exchange | FT.com For Fiscal For Fiscal For Fiscal For Fiscal For Fiscal Year Year Year Year Year 2005 it was 2004 it was 2003 it was 2002 it was 2001 it was $420.7 billion $399.1 billion $396.1 billion. $343.2 billion. $ 296.0 billion

Note: The Iraq and Afghanistan supplementary spending as of end December 2008 = over $ 650 billion. Total Bush administration actual defense spending for 8-year period 2001 to 2008 = US$ 3,898 billion Plus other supplementary amounts that the government requested the total adjusted amount for defense spending for the 8-years of the Bush administration it will reach over the US$ 4 trillion dollar level. Note: The cumulative total actual US Government budget for the 8-year period of the Bush administration was US$ 20 trillion dollars and the actual defense spending for the 8-years was US$ 4 trillion dollar equal to 20 percent of the total. brazilamaral | August 9 9:38am | Permalink

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The Military Industrial Complex became a very important piece of the US economy for the last 70 years, since the 1940s. For a long time the United States has been the number one arms dealer around the world. Why peace on the Middle East it is just a mirage? Here is how it works: The US taxpayer supplies Israel with foreign aid mostly military armaments. In turn that creates more demand from the US Military Industrial Complex to supply armaments to countries such as Saudi Arabia, UAE, Kuwait, and so on Now we go back to the original question: What is the role of the state? Is it part of the role of the state, as it has been the case in the United States for a long time, to cause conflict around the world to keep its Military Industrial Complex busy at home building all kinds of toys to sell around the world? The US government is doing a great job in that area such as in: Iraq, Afghanistan, Middle East in general, Taiwan, North Korea, Iran, many parts of Africa, Venezuela, Colombia, Germany, Japan and so on The destruction business is a very profitable and important part of the US economy. Nick Antill | August 9 9:47am | Permalink

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The libertarian point is that 'exit' and 'voice' are secondary to 'restraint'. It was not possible to exit the GDR, and its governments were all elected with large majorities. Britain was liberal long before it was democratic. gareth davies | August 9 9:59am | Permalink Dear Martin There are as many variations of roles are there are states. For example who would expect the state in Singapore to play the same role as the state in the USA. Is London a state within a state? Indeed each inidividual may be considered a state with the optimal allocation of energies to various functions fluxing over time. The success of a state therefore might be seen as its ability to respond adaptively to both external and internal demands without a loss of critical integrity. It appears that democracy is the most effective mechanism for most circumstances most of the time. Constantinos Christidis | August 9 10:00am | Permalink To answer the questions posed, there are three kinds of failure that one must consider: First come market failures, like externalities. Internalization of externalities is not a futile exercise, though it is admittedly difficult: it can and should be done (to allow consumers to make rational choices based on the actual cost of their actions), and it is not absolutely necessary to do it through taxation (or subsidies). Market structures can be set up, as in the case of buying and selling CO2 emissions rights, so one has to put his mind to work to find the proper scheme to effect this internalization. Second comes the provision of public goods by the market, i.e. goods that once produced, their consumers can't be made to pay for them, like defense from external enemies. Once someone has set up an army and protects a country with it, others have no reason to pay for it, ergo the creator of the army has to make them pay (this is probably how most governments came about, incidentally). The question here is, which goods are public? The narrow definition would soon show that many of the goods produced by government aren't public, or they needn't be provided as such. A case in point is education and health services: the producer of the goods need not be a government entity, to ensure everyone gets a minimum education. The concept of the "public service" which is provided by a private party further to bidding allows for even the remotest and least accessible community to enjoy medical and educational facilities, at a minimum cost to the taxpayer.

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What is the role of the state? | Martin Wolf's Exchange | FT.com And third, there is the failure of government. Democratic government does not necessarily mean the rule of the majority, and even if it did, there is no guarantee the majority is right. A coalition of special interest minorities can get the minimum number of votes required for a parliamentary majority (e.g. in Greece, a party only needs 40.2% of the electorate to enjoy a parliamentary majority, and this is probably similar to other places out there). Then there's the question of the moral hazard of the representative agent: more often than not, and this is not limited to government but can be seen in large corporations as well, the person entrusted to pursue the interests of stakeholders (voters and taxpayers or shareholders) does not do so, but promotes his interests, such as maximizing his income and prestige. This means people may actually vote for a policy which they believe to be in their interest, and then frustratingly discover that this isn't the case. Lastly, majorities often prove wrong. Lastly, there is the issue of redistribution: to a certain extent it is unavoidable. By its very nature, government will take money from the taxpayer and hand it off to someone else. Even if government doesn't hand out benefits, public employees stand to benefit by taxing the rest of the population and given their services aren't priced on a competitive market, to a certain extent their incomes may be a transference of funds rather than payment for services rendered. So, even if there isn't a welfare state, government by its very existence redistributes income, even if it is only to its employees (which it isn't). Moreover, many people share the view government should redistribute income in order to maximize utility, and thus comes the welfare state into play. Bypassing the obvious flaws of such a policy proposition (utility, an immeasurable and highly subjective concept, differs among individuals, so how can anyone pursue an egalitarian policy and still arrive at utility maximization?) two questions remain. One is whether extensive redistribution (beyond the minimum implied by government's existence) affects employment. This writer says it does: heavy taxation on higher incomes limits both their consumption, and, more importantly, their investment. It thus leads to a reduced accumulation of capital and therefore hampers the creation of jobs. In this respect, it limits the productive limits of an economy and thereby reduces the income that can be enjoyed by every individual (rich and poor alike), therefore limiting their potential to maximize their utility on their own terms, i.e. redistribution is selfdefeating. Proving this empirically is more challenging than one would think, but a case in point is necessary; Japan and South Korea, which have relatively small government, enjoy lower unemployment rates than Western Europe, which has larger government, and the US is somewhere between. However, there are more explanatory variables in play than just the size and scope of the welfare state to be able to isolate it and draw indisputable conclusions. Nevertheless, it is well established that the existence of the welfare-state, particularly a redistributing pension system, leads to lower propensities to save, and therefore makes capital more scarce. Also, the twin taxation of capital (first as corporate profits, then as shareholder income) distorts investing patterns: it renders leverage more attractive than equity and this is one of the reasons why the financial sector has gotten so bloated. The other is of a moral nature: on what basis does anyone claim they have the right to limit one person's enjoyment of their income and wealth for the benefit of some other person? How can one say that person X's consumption is better than person Y's, especially if it is funded by person Y, or that the services offered by the government (e.g. subsidizing theaters) are more beneficial than those of the private sector (nudie-bars)? Consumers by the choices they make with their money say it isn't so, so how can the government decide otherwise and tax away money they'd spend on what they like, to finance something that they do like? Isn't this limiting a person's freedom? Moreover, since almost invariably taxpayer money is not enough to fund big government and government has to borrow funds, in what stage of the democratic process do future generations (which will have to pay for borrowed funds - or suffer bankruptcy) get a say? Since they don't, do we today have the moral right to borrow money for our purposes, only to pass down the bill to someone else? There is the concept of the "social contract", which says that the moment someone is born they make a contract with the government to pay taxes, in order to enjoy the services and capital society has accumulated thus far. Bypassing the obvious flaw of this proposition in that contracts must be voluntary and are not put in effect automatically when you're born, it is noteworthy that much of the infrastructure government provides through general taxation or indebtedness, can be done so by having its actual users pay for it (e.g. tolls at motorways), i.e. it generally isn't necessary to burden the taxpayer with their provision, and therefore they shouldn't be part of any "social contract" - it is more sound economically to have users pay for them at any rate. In short, it is my view that the scope of government needs to be reconsidered, and scaled back to improve employment. Many of the services and infrastructure provided by government can and should be supplied by the private sector. Accepting that universal education is necessary (children being minors, they shouldn't be burdened by their parents' poor financial state) does not mean schools should be provided by the government (or that government should pay for everyone's education - isn't it sufficient to pay only for those who really can't afford it, given it's mandatory for everyone?). This isn't the time and place to put down what government should and shouldn't do, but merely to put forward that government can and should be smaller than it is, and that this would have a positive impact as it would promote higher employment rates. Constantinos Christidis charles monneron | August 9 11:01am | Permalink A dense and insightful essay. Thanks for that. I would add that an important quality of a well functioning state is decision consistency. It is especially important in the context of democratic representative government, as it is well known that pure decision making through voting leads to inconsistent and suboptimal outcomes. It is not only a consequence of bounded rationality (a delicate euphemism to characterize our intellectual and moral frailties), but also the result of fundamental flaws in the voting game itself, as demonstrated by many of your economists colleagues. Enforcing consistency is probably the most important restraint that should be implemented in a state, through a combination of bureaucratic power ( that includes central banks) and judicial power. It requires civil

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What is the role of the state? | Martin Wolf's Exchange | FT.com servants trained in recognizing irrationality biases and avoiding them. For this purpose, it is unfortunate that most of the civil servant class (both in the judicial and the executive domain) is mainly trained through humanities and lack the quantitative culture that could enable them to implement decisions consistently with established science. Deep knowledge of Bayes's formula and its consequences should be a prerequisite here... The other important function is to prevent the establishment of permanent rents, by suppressing them, limiting them in time or nationalizing them for the benefit of the public. Euthanasia of the rentier class is a permanent requirement, especially difficulty to achieve when part or even all of the rentier class is itself identified to the state apparatus. This is a distressingly familiar outcome nowadays ! Itzman | August 9 11:16am | Permalink Oh to be an academic economist. Its so much easier to run a business. There the role of the board, and management, is simply to ensure the whole company is viable, employees do not tear each others throats out, and productive people who have temporary difficulties are taken care of until they can be productive again. Beyond that, its not one's problem. Governments would do well to rethink what their responsibilities should be. Supporting the weak and vulnerable creates more weak and vulnerable. Emphasising self worth and de-emphasising competitive performance creates a society of smug incompetents. The philosophical arguments of whether or not we should be a society of ants, or a wolf pack, get lost when society itself collapses under the weight of its ideologies: With respect Martin, agonising over what the State should be, is the luxury of those with too little to do in a state which has more GDP than its citizens know what to do with. The situation today is that these arguments will get drowned out in the roar of outrage when it is finally revealed across the West that no matter what the ideology, the State will do what it can afford to do, and it had better not try to do more. If there is no money for a policeman on every street corner, to control food rioting, and street crime, there will be no go areas. Right now, the UK state at least has but one function. To somehow create not a fairer society, but some kind of economically viable society that does not rely on debt for growth, and a Ponzi scheme to pay its pensions. That society will inevitably be at a lower standard of living than we are used to. It will inevitably be less centrist. It will inevitably fall harder on some than others. Perhaps the best that economists and governments can do is be frank about it, and pass the problem to the individuals social conscience. Less taxes, but you could give a fiver to the homeless junkie begging on your street corner?. Life is unfair. Perhaps the responsibility of governments is to educate people to realize that, be self reliant enough to face up to it, and admit they are not the most appropriate instruments to correct it. Viator | August 9 11:21am | Permalink

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People love to talk about the externalities of private enterprise. But what are the externalities of the state? What were the externalities created by the states involved in the Battle of the Somme? What are the externalities of the states of Europe where society is smothered by undemocratic bureaucracy while the streets of cities are unsafe with nightly muggings and gays and Jews are routinely attacked? What are the externalities of unending stimulus which distorts society turning private enterprise into either failures or handmaidens of the state? Needless to say the state creates manifest externalities. It would be useful to include them in discussions. brazilamaral | August 9 11:23am | Permalink

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Regarding my article about dictatorship in Brazil, the enclosed article caused a sensation in the Brazilian mainstream media, and also with the Brazilian government, and the Brazilian government mentioned my article on 3 Brazilian government websites including: 1) The State Department, 2) The Justice Department, and the 3) Planning and Development Department. The article got the attention of the Brazilian government, because for the last few months I started receiving all kinds of information about new legislation regarding corruption, and new laws that affect the police in Brazil. A Congressman (Deputado Federal) from the state of Sao Paulo started sending me all this info since my article was published. Basically my article was in response to one of the major responsibilities of the state. What is the number one priority of the state? Most people would say it is defense of the country against foreign invasion of any kind. But what happens when there is an internal problem that is getting out of control such as in the case that I mentioned on my article? What is the role of the state when criminal gangs, the mafias and narcotraffic are turning the country into chaos?

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What is the role of the state? | Martin Wolf's Exchange | FT.com ***** The Brazilian Formula for Success - Dictatorship Written by Ricardo C. Amaral Brazzil magazine - Tuesday, 13 April 2010 http://www.brazzil...-dictatorship.html The Brazilian formula for success includes periods of dictatorship, and Brazil had three periods in its history when Brazil benefited from being under a certain form of a government: benevolent dictatorial regime. ***** Here is another actual event that happened on Monday April 26, 2010 to back up my article The Brazilian Formula for Success Dictatorship. A frontpage article published on Folha de Sao Paulo (a major newspaper in Sao Paulo, Brazil) dated April 27, 2010 was about the Brazilian narcotraffic attempted to kill Paraguayan Senator Roberto Acevedo. They killed the other 2-people who were with the senator on his car at the time of the attack, and the senator was lucky to survive that attack with only 2 bullets on his body there were more than 40 shoots fired against his car. The senator attackers belong to the most dangerous mafia and Brazilian narcotraffic group in Brazil called PCC (Primeiro Comando da Capital). On Thursday, August 4, 2010 a Folha de Sao Paulo had another frontpage article showing that narcotraffic is completely out of control, the article said: that in the last 18 days Mexico had 3,174 assassinations in relation to the narcotraffic the equivalent of about 176 deaths per day. Martin Wolf | August 9 11:53am | Permalink

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@ Itzman, Running a business is much simpler than running a government. Why not accept that, since it is obviously true? A business has a well-defined and simple objective. Government does not. Government is about balancing often incompatible goals. It is an extraordinarily difficult exercise. @ Nick Antill, Yes, Britain was liberal before it was democratic. But how liberal was it? Was capital punishment for the theft of a loaf of bread liberal? It depends on how one weighs life against property. The truth is that the liberal government of pre-democratic England worked in favour of the propertied. Is this surprising? Hardly. Martin Wolf | August 9 11:58am | Permalink

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@ itzman, sorry, I didn't respond to the rest of what you said. It was not, I think, a serious contribution, but a familiar one. Do you think people get cancer because they are not trying hard enough? And if we have too much GDP (and indeed we are all richer in the west than we have ever been), why can we not afford the public goods we used to afford? Answer comes there none, of course. Life is unfair, you say. And your response? Make it more so. An impressive position! bazza | August 9 12:20pm | Permalink

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Regulation of financial markets along with some central management of the economy has to be a key role of the state. Even the most libertarian would probably agree that some regulation of markets is justified. Without it, insider trading, market cornering and fraud would be widespread. The idea of the "free market" is a red herring totally free markets (and individuals) have no place in modern societies (as Isaiah Berlin wrote "total freedom for wolves is death to lambs"). Therefore, when it comes to financial regulation, the question is just about how much is appropriate. The state is perhaps the only reasonable provider of this regulation. Furthermore, in the last few years we have seen that the economy cannot function alone without some central management. The state or state proxies need to be lenders of last resort and need to prop up failed retail banks where appropriate.

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