American Political Science Review Vol.87,No.3 tributing income to itself when the national income To reach the maximum income attainable at a given falls by the reciprocal of the share of the national tax rate,a society will also need to enforce contracts, income it receives.If the revenue-maximizing tax rate such as contracts for long-term loans,impartially;but were one-half,an autocrat would stop increasing the full gains are again reaped only in the long run. taxes when the national income fell by two dollars To obtain the full advantage from long-run contracts from his last dollar of tax collection.A majority that, a country also needs a stable currency.A stationary say,earned three-fifths of the national income in the bandit will therefore reap the maximum harvest in market and found it optimal to take one-fifth of the taxes-and his subjects will get the largest gain from national income to transfer to itself would necessarily his encompassing interest in the productivity of his be reducing the national income by five-fourths,or domain-only if he is taking an indefinitely long view $1.25,from the last dollar that it redistributed to and only if his subjects have total confidence that itself.Thus the more encompassing an interest-the their"rights"to private property and to impartial larger the share of the national income it receives contract enforcement will be permanently respected taking all sources together-the less the social losses and that the coin or currency will retain its full value from its redistributions to itself.Conversely,the Now suppose that an autocrat is only concerned narrower the interest,the less it will take account of about getting through the next year.He will then the social costs of redistributions to itself. gain by expropriating any convenient capital asset This last consideration makes it clear why the whose tax yield over the year is less than its fotal assumption that the democracy is governed by an value.He will also gain from forgetting about the encompassing interest can lead to much-too-optimis- enforcement of long-term contracts,from repudiating tic predictions about many real-world democracies. his debts,and from coining or printing new money The small parties that often emerge under propor- that he can spend even though this ultimately brings tional representation,for example,may encompass inflation.At the limit,when an autocrat has no only a tiny percentage of a society and therefore may reason to consider the future output of the society at have little or no incentive to consider the social cost of all,his incentives are those of a roving bandit and that is what he becomes. 10 the steps they take on behalf of their narrow constit- uencies.The special interest groups that are the main To be sure,the rational autocrat will have an determinant of what government policies prevail in incentive,because of his interest in increasing the the particular areas of interest to those interest investment and trade of his subjects,to promise that groups have almost no incentive to consider the he will never confiscate wealth or repudiate assets. social costs of the redistributions they obtain.A But the promise of an autocrat is not enforceable by typical lobby in the United States,for example,rep- an independent judiciary or any other independent resents less than 1%of the income-earning capacity source of power,because autocratic power by defini- of the country.It follows from the reciprocal rule that tion implies that there cannot be any judges or other such a group has an incentive to stop arranging sources of power in the society that the autocrat further redistributions to its clients only when the cannot overrule.Because of this and the obvious social costs of the redistribution become at least a possibility that any dictator could,because of an hundred times as great as the amount they win in insecure hold on power or the absence of an heir, redistributional struggle(Olson 1982). take a short-term view,the promises of an autocrat It would therefore be wrong to conclude that are never completely credible.Thus the model of the democracies will necessarily redistribute less than rational self-interested autocrat I have offered is,in dictatorships.Their redistributions will,however,be fact,somewhat too sanguine about economic perfor- shared,often quite unequally,by the citizenry.Dem- mance under such autocrats because it implicitly ocratic political competition,even when it works very assumed that they have (and that their subjects badly,does not give the leader of the government the believe that they have)an indefinitely long planning incentive that an autocrat has to extract the maximum horizon. attainable social surplus from the society to achieve Many autocrats,at least at times,have had short his personal objectives. time horizons:the examples of confiscations,repudi- ated loans,debased coinages,and inflated currencies perpetrated by monarchs and dictators over the LONG LIVE THE KING course of history are almost beyond counting. Perhaps the most interesting evidence about the We know that an economy will generate its maximum importance of a monarch's time horizon comes from income only if there is a high rate of investment and the historical concern about the longevity of mon- that much of the return on long-term investments is archs and from the once-widespread belief in the received long after the investment is made.This social desirability of dynasties.There are many ways means that an autocrat who is taking a long view will to wish a king well;but the king's subjects,as the try to convince his subjects that their assets will be foregoing argument shows,have more reason to be permanently protected not only from theft by others sincere when they say "long live the king."If the but also from expropriation by the autocrat himself.If king anticipates and values dynastic succession,that his subjects fear expropriation,they will invest less, further lengthens the planning horizon and is good and in the long run his tax collections will be reduced. for his subjects. 571 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 tributing income to itself when the national income falls by the reciprocal of the share of the national income it receives. If the revenue-maximizing tax rate were one-half, an autocrat would stop increasing taxes when the national income fell by two dollars from his last dollar of tax collection. A majority that, say, earned three-fifths of the national income in the market and found it optimal to take one-fifth of the national income to transfer to itself would necessarily be reducing the national income by five-fourths, or $1.25, from the last dollar that it redistributed to itself. Thus the more encompassing an interest-the larger the share of the national income it receives taking all sources together-the less the social losses from its redistributions to itself. Conversely, the narrower the interest, the less it will take account of the social costs of redistributions to itself. This last consideration makes it clear why the assumption that the democracy is governed by an encompassing interest can lead to much-too-optimis- tic predictions about many real-world democracies. The small parties that often emerge under propor- tional representation, for example, may encompass only a tiny percentage of a society and therefore may have little or no incentive to consider the social cost of the steps they take on behalf of their narrow constit- uencies. The special interest groups that are the main determinant of what government policies prevail in the particular areas of interest to those interest groups have almost no incentive to consider the social costs of the redistributions they obtain. A typical lobby in the United States, for example, rep- resents less than 1% of the income-earning capacity of the country. It follows from the reciprocal rule that such a group has an incentive to stop arranging further redistributions to its clients only when the social costs of the redistribution become at least a hundred times as great as the amount they win in redistributional struggle (Olson 1982). It would therefore be wrong to conclude that democracies will necessarily redistribute less than dictatorships. Their redistributions will, however, be shared, often quite unequally, by the citizenry. Dem- ocratic political competition, even when it works very badly, does not give the leader of the government the incentive that an autocrat has to extract the maximum attainable social surplus from the society to achieve his personal objectives. LONG LIVE THE KING We know that an economy will generate its maximum income only if there is a high rate of investment and that much of the return on long-term investments is received long after the investment is made. This means that an autocrat who is taking a long view will try to convince his subjects that their assets will be permanently protected not only from theft by others but also from expropriation by the autocrat himself. If his subjects fear expropriation, they will invest less, and in the long run his tax collections will be reduced. To reach the maximum income attainable at a given tax rate, a society will also need to enforce contracts, such as contracts for long-term loans, impartially; but the full gains are again reaped only in the long run. To obtain the full advantage from long-run contracts a country also needs a stable currency. A stationary bandit will therefore reap the maximum harvest in taxes-and his subjects will get the largest gain from his encompassing interest in the productivity of his domain-only if he is taking an indefinitely long view and only if his subjects have total confidence that their "rights" to private property and to impartial contract enforcement will be permanently respected and that the coin or currency will retain its full value. Now suppose that an autocrat is only concerned about getting through the next year. He will then gain by expropriating any convenient capital asset whose tax yield over the year is less than its total value. He will also gain from forgetting about the enforcement of long-term contracts, from repudiating his debts, and from coining or printing new money that he can spend even though this ultimately brings inflation. At the limit, when an autocrat has no reason to consider the future output of the society at all, his incentives are those of a roving bandit and that is what he becomes.10 To be sure, the rational autocrat will have an incentive, because of his interest in increasing the investment and trade of his subjects, to promise that he will never confiscate wealth or repudiate assets. But the promise of an autocrat is not enforceable by an independent judiciary or any other independent source of power, because autocratic power by defini- tion implies that there cannot be any judges or other sources of power in the society that the autocrat cannot overrule. Because of this and the obvious possibility that any dictator could, because of an insecure hold on power or the absence of an heir, take a short-term view, the promises of an autocrat are never completely credible. Thus the model of the rational self-interested autocrat I have offered is, in fact, somewhat too sanguine about economic perfor- mance under such autocrats because it implicitly assumed that they have (and that their subjects believe that they have) an indefinitely long planning horizon. Many autocrats, at least at times, have had short time horizons: the examples of confiscations, repudi- ated loans, debased coinages, and inflated currencies perpetrated by monarchs and dictators over the course of history are almost beyond counting. Perhaps the most interesting evidence about the importance of a monarch's time horizon comes from the historical concern about the longevity of mon- archs and from the once-widespread belief in the social desirability of dynasties. There are many ways to wish a king well; but the king's subjects, as the foregoing argument shows, have more reason to be sincere when they say "long live the king." If the king anticipates and values dynastic succession, that further lengthens the planning horizon and is good for his subjects. 571 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