Dictatorship,Democracy,and Development September 1993 Once peoples learned how to raise crops effec- bandit will take only a part of income in taxes, tively,production increased,population grew,and because he will be able to exact a larger total amount large populations needed governments.When there of income from his subjects if he leaves them with an is a large population,the same logic that shows why incentive to generate income that he can tax small groups can act consensually in their common If the stationary bandit successfully monopolizes interest,tells us that voluntary collective action cannot the theft in his domain,then his victims do not need obtain the gains from a peaceful order or other public to worry about theft by others.If he steals only goods,even when the aggregate net gains from the through regular taxation,then his subjects know that provision of basic public goods are large.2 The main they can keep whatever proportion of their output is reason is that the typical individual in a society with, left after they have paid their taxes.Since all of the say,a million people will get only about one-mil- settled bandit's victims are for him a source of tax lionth of the gain from a collective good,but will bear payments,he also has an incentive to prohibit the the whole cost of whatever he or she does to help murder or maiming of his subjects.With the rational provide it,and therefore has little or no incentive to monopolization of theft-in contrast to uncoordi- contribute to the provision of the collective good. nated competitive theft-the victims of the theft can There is by now a huge theoretical and empirical expect to retain whatever capital they accumulate out literature on this point,and the great preponderance of after-tax income and therefore also have an incen- of this literature agrees that,just as small groups can tive to save and to invest,thereby increasing future usually engage in spontaneous collective action,very income and tax receipts.The monopolization of theft large groups are not able to achieve collective goals and the protection of the tax-generating subjects through voluntary collective action. thereby eliminates anarchy.Since the warlord takes a Thus we should not be surprised that while there part of total production in the form of tax theft,it will have been lots of writings about the desirability of also pay him to provide other public goods whenever "social contracts"to obtain the benefits of law and the provision of these goods increases taxable income order,no one has ever found a large society that sufficiently. obtained a peaceful order or other public goods In a world of roving banditry there is little or no through an agreement among the individuals in the incentive for anyone to produce or accumulate any- society. thing that may be stolen and,thus,little for bandits to steal.Bandit rationality,accordingly,induces the bandit leader to seize a given domain,to make himself the ruler of that domain,and to provide a THE FIRST BLESSING OF THE peaceful order and other public goods for its inhab- INVISIBLE HAND itants,thereby obtaining more in tax theft than he could have obtained from migratory plunder.Thus Why,then,have most populous societies throughout we have"the first blessing of the invisible hand":the history normally avoided anarchy?An answer came rational,self-interested leader of a band of roving to me by chance when reading about a Chinese bandits is led,as though by an invisible hand,to warlord (see Sheridan 1966).In the 1920s,China was settle down,wear a crown,and replace anarchy with in large part under the control of various warlords. government.The gigantic increase in output that They were men who led some armed band with normally arises from the provision of a peaceful order which they conquered some territory and who then and other public goods gives the stationary bandit a appointed themselves lords of that territory.They far larger take than he could obtain without providing taxed the population heavily and pocketed much of government. the proceeds.The warlord Feng Yu-hsiang was noted Thus government for groups larger than tribes for the exceptional extent to which he used his army normally arises,not because of social contracts or for suppressing bandits and for his defeat of the voluntary transactions of any kind,but rather be- relatively substantial army of the roving bandit,White cause of rational self-interest among those who can Wolf.Apparently most people in Feng's domain organize the greatest capacity for violence.These found him much preferable to the roving bandits. violent entrepreneurs naturally do not call them- At first,this seems puzzling:Why should war- selves bandits but,on the contrary,give themselves lords,who were stationary bandits continuously steal- and their descendants exalted titles.They sometimes ing from a given group of victims,be preferred,by even claim to rule by divine right.Since history is those victims,to roving bandits who soon departed? written by the winners,the origins of ruling dynas- The warlords had no claim to legitimacy and their ties are,of course,conventionally explained in terms thefts were distinguished from those of roving ban- of lofty motives rather than by self-interest.Autocrats dits only because they took the form of continuing of all kinds usually claim that their subjects want taxation rather than occasional plunder. them to rule and thereby nourish the unhistorical In fact,if a roving bandit rationally settles down assumption that government arose out of some kind and takes his theft in the form of regular taxation and of voluntary choice.(These claims have an echo in at the same time maintains a monopoly on theft in his some literature in the"transactions costs"tradition domain,then those from whom he exacts taxes will that attempts to explain the emergence of various have an incentive to produce.The rational stationary kinds of governments partly or wholly through vol- 568 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/termsDictatorship, Democracy, and Development September 1993 Once peoples learned how to raise crops effec- tively, production increased, population grew, and large populations needed governments. When there is a large population, the same logic that shows why small groups can act consensually in their common interest, tells us that voluntary collective action cannot obtain the gains from a peaceful order or other public goods, even when the aggregate net gains from the provision of basic public goods are large.2 The main reason is that the typical individual in a society with, say, a million people will get only about one-mil- lionth of the gain from a collective good, but will bear the whole cost of whatever he or she does to help provide it, and therefore has little or no incentive to contribute to the provision of the collective good. There is by now a huge theoretical and empirical literature on this point, and the great preponderance of this literature agrees that, just as small groups can usually engage in spontaneous collective action, very large groups are not able to achieve collective goals through voluntary collective action.3 Thus we should not be surprised that while there have been lots of writings about the desirability of "social contracts" to obtain the benefits of law and order, no one has ever found a large society that obtained a peaceful order or other public goods through an agreement among the individuals in the society. THE FIRST BLESSING OF THE INVISIBLE HAND Why, then, have most populous societies throughout history normally avoided anarchy? An answer came to me by chance when reading about a Chinese warlord (see Sheridan 1966). In the 1920s, China was in large part under the control of various warlords. They were men who led some armed band with which they conquered some territory and who then appointed themselves lords of that territory. They taxed the population heavily and pocketed much of the proceeds. The warlord Feng Yu-hsiang was noted for the exceptional extent to which he used his army for suppressing bandits and for his defeat of the relatively substantial army of the roving bandit, White Wolf. Apparently most people in Feng's domain found him much preferable to the roving bandits. At first, this seems puzzling: Why should war- lords, who were stationary bandits continuously steal- ing from a given group of victims, be preferred, by those victims, to roving bandits who soon departed? The warlords had no claim to legitimacy and their thefts were distinguished from those of roving ban- dits only because they took the form of continuing taxation rather than occasional plunder. In fact, if a roving bandit rationally settles down and takes his theft in the form of regular taxation and at the same time maintains a monopoly on theft in his domain, then those from whom he exacts taxes will have an incentive to produce. The rational stationary bandit will take only a part of income in taxes, because he will be able to exact a larger total amount of income from his subjects if he leaves them with an incentive to generate income that he can tax. If the stationary bandit successfully monopolizes the theft in his domain, then his-victims do not need to worry about theft by others. If he steals only through regular taxation, then his subjects know that they can keep whatever proportion of their output is left after they have paid their taxes. Since all of the settled bandit's victims are for him a source of tax payments, he also has an incentive to prohibit the murder or maiming of his subjects. With the rational monopolization of theft-in contrast to uncoordi- nated competitive theft-the victims of the theft can expect to retain whatever capital they accumulate out of after-tax income and therefore also have an incen- tive to save and to invest, thereby increasing future income and tax receipts. The monopolization of theft and the protection of the tax-generating subjects thereby eliminates anarchy. Since the warlord takes a part of total production in the form of tax theft, it will also pay him to provide other public goods whenever the provision of these goods increases taxable income sufficiently. In a world of roving banditry there is little or no incentive for anyone to produce or accumulate any- thing that may be stolen and, thus, little for bandits to steal. Bandit rationality, accordingly, induces the bandit leader to seize a given domain, to make himself the ruler of that domain, and to provide a peaceful order and other public goods for its inhab- itants, thereby obtaining more in tax theft than he could have obtained from migratory plunder. Thus we .have "the first blessing of the invisible hand": the rational, self-interested leader of a band of roving bandits is led, as though by an invisible hand, to settle down, wear a crown, and replace anarchy with government. The gigantic increase in output that normally arises from the provision of a peaceful order and other public goods gives the stationary bandit a far larger take than he could obtain without providing government. Thus government for groups larger than tribes normally arises, not because of social contracts or voluntary transactions of any kind, but rather be- cause of rational self-interest among those who can organize the greatest capacity for violence. These violent entrepreneurs naturally do not call them- selves bandits but, on the contrary, give themselves and their descendants exalted titles. They sometimes even claim to rule by divine right. Since history is written by the winners, the origins of ruling dynas- ties are, of course, conventionally explained in terms of lofty motives rather than by self-interest. Autocrats of all kinds usually claim that their subjects want them to rule and thereby nourish the unhistorical assumption that government arose out of some kind of voluntary choice. (These claims have an echo in some literature in the "transactions costs" tradition that attempts to explain the emergence of various kinds of governments partly or wholly through vol- 568 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