American Political Science Review Vol.87,No.3 untary contracts and the costs of the transactions rent and to levy this monopoly charge on everything, associated with them.See Barzel 1991;Kiser and including human labor. Barzel 1991;North 1981;North and Thomas 1973.) In other words,the autocratic ruler has an incen- Any individual who has autocratic control over a tive to extract the maximum possible surplus from the country will provide public goods to that country whole society and to use it for his own purposes. because he has an"encompassing interest"in it.5 The Exactly the same rational self-interest that makes a extent of the encompassing interest of an office- roving bandit settle down and provide government holder,political party,interest group,monarch,or for his subjects also makes him extract the maximum any other partial or total "owner"'of a society varies possible amount from the society for himself.He will with the size of the stake in the society.The larger or use his monopoly of coercive power to obtain the more encompassing the stake an organization or maximum take in taxes and other exactions. individual has in a society,the greater the incentive The consumption of an autocratic ruler is,more- the organization or individual has,to take action to over,not limited by his personal capacities to use provide public goods for the society.If an autocrat food,shelter,or clothing.Though the pyramids,the received one-third of any increase in the income of palace of Versailles,the Taj Mahal,and even Imelda his domain in increased tax collections,he would Marcos's three thousand pairs of shoes were expen- then get one-third of the benefits of the public goods sive,the social costs of autocratic leaders arise mostly he provided.He would then have an incentive to out of their appetites for military power,international provide public goods up to the point where the prestige,and larger domains.It took a large propor- national income rose by the reciprocal of one-third,or tion of the total output of the Soviet Union,for three,from his last unit of public good expenditure. example,to satisfy the preferences of its dictators. Though the society's income and welfare would Some writers use the metaphor of the"predatory obviously be greater from a larger expenditure on state"but this is misleading,even for autocracies.As public goods,the gain to society from the public we saw earlier,a stationary bandit has an encompass- goods that a rational self-interested autocrat provides ing interest in the territory he controls and accord- are nonetheless often colossal.Consider,for exam- ingly provides domestic order and other public ple,the gains from replacing a violent anarchy with a goods.Thus he is not like the wolf that preys on the minimal degree of public order. elk,but more like the rancher who makes sure that From history,we know that the encompassing his cattle are protected and given water.The meta- interest of the tax-collecting autocrat permits a con- phor of predation obscures the great superiority of siderable development of civilization.From not long stationary banditry over anarchy and the advances of after the first development of settled agriculture until, civilization that have resulted from it.No metaphor say,about the time of the French Revolution,the or model of even the autocratic state can therefore be overwhelming majority of mankind was subject to correct unless it simultaneously takes account of the autocracy and tax theft.History until relatively recent stationary bandit's incentive to provide public goods times has been mostly a story of the gradual progress at the same time that he extracts the largest possible of civilization under stationary bandits interrupted by net surplus for himself. occasional episodes of roving banditry.From about Although the forms that stationary banditry has the time that Sargon's conquests created the empire taken over the course of history are diverse,the of Akkad until,say,the time of Louis XVI and essence of the matter can be seen by assuming that Voltaire,there was an impressive development of the autocrat gets all of his receipts in the form of civilization that occurred in large part under station- explicit taxation.The rational autocrat will devote ary banditry. some of the resources he obtains through taxation to public goods but will impose far higher tax rates than are needed to pay for the public goods since he also uses tax collections to maximize his net surplus.The THE GRASPING HAND higher the level of provision of public goods,given the tax rate,the higher the society's income and the We can now begin to reconcile the village monar- yield from this tax rate.At the same time,the higher chist's insight and the foregoing argument with the the tax rate,given the level of public-good provision, case for democracy.Though the village monarchist the lower the income of society,since taxes distort was right in saying that the absolute ruler has as incentives. much incentive to fix what needs repair as the owner So what tax rate and what level of public good of a house,his analogy is nonetheless profoundly provision will the rational self-interested autocrat misleading.The autocrat is not in a position analo- choose?Assume for the moment that the autocrat's gous to the owner of a single house or even to the level of public-good expenditure is given.As Joseph owner of all housing,but rather to the owner of all Schumpeter (1991)lucidly pointed out,and Ibn wealth,both tangible and human,in a country.The Kalduhn(1967)sensed much earlier,tax receipts will autocrat does indeed have an incentive to maintain (if we start with low taxation)increase as tax rates and increase the productivity of everything and ev- increase,but after the revenue-maximizing rate is eryone in his domain,and his subjects will gain from reached,higher tax rates distort incentives and re- this.But he also has an incentive to charge a monopoly duce income so much that tax collections fall.The 569 This content downloaded from 202.120.14.67 on Sun,19 Feb 2017 15:11:57 UTC All use subject to http://about.jstor.org/termsAmerican Political Science Review Vol. 87, No. 3 untary contracts and the costs of the transactions associated with them. See Barzel 1991; Kiser and Barzel 1991; North 1981; North and Thomas 1973.)4 Any individual who has autocratic control over a country will provide public goods to that country because he has an "encompassing interest" in it.5 The extent of the encompassing interest of an office- holder, political party, interest group, monarch, or any other partial or total "owner" of a society varies with the size of the stake in the society. The larger or more encompassing the stake an organization or individual has in a society, the greater the incentive the organization or individual has to take action to provide public goods for the society. If an autocrat received one-third of any increase in the income of his domain in increased tax collections, he would then get one-third of the benefits of the public goods he provided. He would then have an incentive to provide public goods up to the point where the national income rose by the reciprocal of one-third, or three, from his last unit of public good expenditure. Though the society's income and welfare would obviously be greater from a larger expenditure on public goods, the gain to society from the public goods that a rational self-interested autocrat provides are nonetheless often colossal. Consider, for exam- ple, the gains from replacing a violent anarchy with a minimal degree of public order. From history, we know that the encompassing interest of the tax-collecting autocrat permits a con- siderable development of civilization. From not long after the first development of settled agriculture until, say, about the time of the French Revolution, the overwhelming majority of mankind was subject to autocracy and tax theft. History until relatively recent times has been mostly a story of the gradual progress of civilization under stationary bandits interrupted by occasional episodes of roving banditry. From about the time that Sargon's conquests created the empire of Akkad until, say, the time of Louis XVI and Voltaire, there was an impressive development of civilization that occurred in large part under station- ary banditry.6 THE GRASPING HAND We can now begin to reconcile the village monar- chist's insight and the foregoing argument with the case for democracy. Though the village monarchist was right in saying that the absolute ruler has as much incentive to fix what needs repair as the owner of a house, his analogy is nonetheless profoundly misleading. The autocrat is not in a position analo- gous to the owner of a single house or even to the owner of all housing, but rather to the owner of all wealth, both tangible and human, in a country. The autocrat does indeed have an incentive to maintain and increase the productivity of everything and ev- eryone in his domain, and his subjects will gain from this. But he also has an incentive to charge a monopoly rent and to levy this monopoly charge on everything, including human labor. In other words, the autocratic ruler has an incen- tive to extract the maximum possible surplus from the whole society and to use it for his own purposes. Exactly the same rational self-interest that makes a roving bandit settle down and provide government for his subjects also makes him extract the maximum possible amount from the society for himself. He will use his monopoly of coercive power to obtain the maximum take in taxes and other exactions. The consumption of an autocratic ruler is, more- over, not limited by his personal capacities to use food, shelter, or clothing. Though the pyramids, the palace of Versailles, the Taj Mahal, and even Imelda Marcos's three thousand pairs of shoes were expen- sive, the social costs of autocratic leaders arise mostly out of their appetites for military power, international prestige, and larger domains. It took a large propor- tion of the total output of the Soviet Union, for example, to satisfy the preferences of its dictators.7 Some writers use the metaphor of the "predatory state" but this is misleading, even for autocracies. As we saw earlier, a stationary bandit has an encompass- ing interest in the territory he controls and accord- ingly provides domestic order and other public goods. Thus he is not like the wolf that preys on the elk, but more like the rancher who makes sure that his cattle are protected and given water. The meta- phor of predation obscures the great superiority of stationary banditry over anarchy and the advances of civilization that have resulted from it. No metaphor or model of even the autocratic state can therefore be correct unless it simultaneously takes account of the stationary bandit's incentive to provide public goods at the same time that he extracts the largest possible net surplus for himself. Although the forms that stationary banditry has taken over the course of history are diverse, the essence of the matter can be seen by assuming that the autocrat gets all of his receipts in the form of explicit taxation. The rational autocrat will devote some of the resources he obtains through taxation to public goods but will impose far higher tax rates than are needed to pay for the public goods since he also uses tax collections to maximize his net surplus. The higher the level of provision of public goods, given the tax rate, the higher the society's income and the yield from this tax rate. At the same time, the higher the tax rate, given the level of public-good provision, the lower the income of society, since taxes distort incentives. So what tax rate and what level of public good provision will the rational self-interested autocrat choose? Assume for the moment that the autocrat's level of public-good expenditure is given. As Joseph Schumpeter (1991) lucidly pointed out, and Ibn Kalduhn (1967) sensed much earlier,8 tax receipts will (if we start with low taxation) increase as tax rates increase, but after the revenue-maximizing rate is reached, higher tax rates distort incentives and re- duce income so much that tax collections fall. The 569 This content downloaded from 202.120.14.67 on Sun, 19 Feb 2017 15:11:57 UTC All use subject to http://about.jstor.org/terms