The Political Economy of Leviathan

Abstract

The theory of the state is something that most economists have been content to leave to the political scientists. When the state does appear in economic analysis it usually does so in one or the other of the following roles. One is as a benign and omniscient authority that obligingly imposes taxes, bounties or other measures at just the right level to offset some ‘distortion’ in the price mechanism, owing say to externalities of one sort or another, so as to assure Pareto-efficiency of market outcomes. This aspect of the state in economics is particularly pronounced in what may be called the Pigou—Meade tradition in welfare economics, which has dominated the modern developments of public finance and international trade. The other, dramatically opposed role of the state in standard economic analysis, is as the culpable or innocent tool of malevolent special interests, that instead of correcting distortions à la Pigou and Meade is the very source of them, e.g. minimum wage or usury laws, rent control, tariffs and so on. Conservative economists denounce these interventions on both equity and efficiency grounds, while liberals are apt to be apologetic, sympathising with real or alleged distributional objectives but usually pointing out that alternative (not always feasible) measures could be used that would achieve these goals at a lower cost in efficiency.

Findlay’s work on this paper was mostly done while visiting the Institute for International Economic Studies in Stockholm. We would like to thank participants in seminars at Stockholm and the University of Maryland for very helpful comments.