Toward a limited state.

• Author: Balcerowicz, Leszek

This article focuses on the criteria that help delineate the optimal scope of government and on the questions regarding the relationship between the individual and the state. I begin with some clarifications regarding the concept of the state, as many structures conventionally recognized as "states" fall short of even the elementary requirements put forward in the normative debates about what the "state" should do. The article concludes by arguing that the classical vision of the limited state is optimal in the sense of providing the best defense of economic liberties and personal freedom.

The Institutional System and the State

History shows that every large and lasting territorial group of people has had a set of interpersonal rules and, in more modern societies, a system of organizations that govern cooperation, resolution of conflicts, and defense. Some of those institutional systems are called "states." Which group has a state and which one has a stateless institutional system obviously depends on the definition of the state. The most widely used is Max Weber's definition: The state exists whenever there is a special apparatus that has a monopoly on the use of force in a given territory (Weber 1922: 29-30). (1) Structures that do not meet this condition are not recognized as states. For example, a charity is not a state, but a "welfare state" is. By Weber's definition, structures in which the ruling group commits crimes against other members living in the same territory would still be called a state, albeit a predatory one (e.g., the former Republic of Zaire under Mobutu Seko-Seko).

As a starting point in the debate on the optimal scope of the state's activity, one can turn to Robert Nozick's concept of a minimal state-that is, one limited to the "functions of protecting all its citizens against violence, theft, and fraud, and to the enforcement of contracts" (Nozick 1974: 26).

Are Optimal States Different for Different Societies?

Does the vision of an optimal state depend on the characteristics of existing states or on the features of the underlying societies? For example, should the state do more (or less) in poorer countries than in richer ones? Or does the optimal scope of the state's activity depend on the ethnic composition of the population and the resulting extent of intrasocietal tension?

Another issue is whether the optimal scope of government emerges from the democratic process. If so, one could argue that the optimal scope of the state in some societies includes more redistribution at the cost of economic growth while other societies prefer less redistribution and more growth. However, taking majority rule as the criterion for judging the state's actions is risky, because it implies the necessity of accepting any decision of the majority, including the prosecution of minorities, expropriation, and confiscatory taxation. Hence, majority rule has to be constrained, which highlights the need for other criteria for delineating the scope of the state.

The response to the question of whether the optimal state is different for different societies largely depends on whether individuals in various communities are fundamentally different. I think that there are sufficiently strong motivational and cognitive invariants constituting human nature, so that the optimal scope of the state is broadly similar across communities. Policies based on the opposite view--for instance, proposing that poorer societies need a more interventionist state because poor farmers do not respond well to the standard economic incentives--have been a major reason for the perpetuation of poverty in the Third World (Bauer 1976, Schultz 1980). A much more dramatic mistake has been committed by Marxism, which assumed that the elimination of private ownership would produce a new and better individual.

A more recent version of the statist fallacy refers to informational deficiencies of markets (i.e., individuals) in poorer societies as the rationale for a more regulatory state. This recommendation is puzzling because the extent of actual regulations in the developing world is widely in excess of what could be justified by any efficiency considerations (Djankov et al. 2002). Also, one should consider the possibility that some of the functions belonging to the optimal set of state activities may be transferred to external bodies, such as international organizations. We would then face the question of the optimal distribution of this set of state activities and the related issue of the changed role of the nation state. Such issues are at the heart of the constitutional debate in the European Union (Creveld 1999: 402-21; Mathews 1997: 50-65).

Criteria for Delineating the Optimal State

The standard economies approach to delineating the optimal set of the state's functions is unsatisfactory. (2) In particular, when economists such as Joseph Stiglitz (1988: 24) indicate that "a primary role of government" is to provide the legal framework "within which all economic transactions occur," not much is said about the desired content of the laws, and how it might affect the desirability or efficiency of their enforcement. Besides, there is typically no mention of nonstate enforcement mechanisms and their relationship to those of the state. The impression is created that all conflict resolution in economic life is in the unavoidable domain of the state. That impression is in contrast with the empirical evidence (see, e.g., Greif 1997, Gow and Swinnen 2001, and Waldmeir 2001).

This confusion is related to the use that is made of the concept of public goods as being nonrival in consumption and nonexclusive (Samuelson 1954: 387-89). If these goods are to be provided at all, taxes and the related state's coercion are necessary. However, which goods are truly public? Is the justice system the domain of the state because the relevant services are a public good? Clearly, that cannot be said of all such services. Then, which "justice services" constitute a public good? Is the lighthouse, the favorite textbook example of a public good, a public good? Ronald Coase (1974) has shown that lighthouses in 19th century Britain were operated and financed privately. This finding, however, has not prevented the lighthouse to continue serving as the primary example of a public good in many textbooks (e.g., Stiglitz 1988: 75).

There may be fewer public goods in real life than typically assumed. As a result, the necessary (or desirable) scope of the state's activity may be narrower, too. Some of the goods declared "public" may in fact be private goods, pushed into the state's domain by public intervention that has eliminated or undercut the possibility of voluntary private financing of these goods. In other words, some uses of the theoretical concept of public goods may inadvertently constitute ex post justifications for the results of previous expansion of state activity.

The concept of "externalities" suffers from similar weaknesses. It is all too easy to suggest that social benefits are larger than private ones (positive externalities) or that social costs exceed private costs (negative externalities) and demand public intervention. It has been established that at least some externalities may result from institutional imperfections, that is, inappropriately specified property rights (Mises 1949: 654-63). In such a case, the solution would not be additional state intervention but the elimination of obstacles blocking the development of private property rights. That may require abolishing some previous state interventions. And the Coase Theorem (1960: 45-56) points out the possibility that some externalities may be dealt with by direct negotiations between the interested parties.

It is not surprising that Charles Wolf Jr., an economist at the RAND Corporation, ends his comprehensive analysis of the treatment of market failures in the economies literature by stating, "There is no formula for establishing the essential minimum threshold of government activities and outputs" (Wolf 1988: 153). This agnostic conclusion is a fair summary of the literature's position on the optimal scope of the state's activity.

Back to Basics

Amartya Sen (1999: 27) identifies the main reason why economies has been so ambiguous on the desirable scope of the state: "The discipline of economies has tended to move away from focusing on the value of freedoms to that of utilities, incomes and wealth. This narrowing focus leads to an underappreciation of the full role of the market mechanism." (3) Like F. A. Hayek (1960), Sen thinks that economies has moved too much in the direction of judging the state's actions only in light of their expected consequences, at the cost of weakening the intellectual case for basic individual liberties as criteria for delineating the admissible and desirable scope of state activity.

Economic freedom is defined as the "absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself" (Beach and O'Driscoll: 2003). The central elements of economic freedom are secure rights to legally acquired property, freedom to engage in voluntary transactions inside and outside a nation's borders, freedom from governmental control of the terms on which individuals transact, and freedom from governmental expropriation of property rights (Babushka 1991, Hanke and Walters 1997). There are two basic types of restrictions of economic freedom: restrictive regulations and taxes that go beyond the level necessary to finance the scope of the state's operation required for the protection of classical economic (and other) liberties. (4)

Developments during the 20th century have seriously weakened the intellectual and constitutional position of economic freedom in the West. I focus on two examples indicative of a broader tendency. First, in his widely...