[Paleopsych] Stationary Bandit Package

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The term was coined by the late Mancur Olson, and it is a powerful way of 
thinking about the state. I suggest reading the second article closely, as 
it shows how Public Choice economists think at their most characteristic. 
We should all move away from the "this is what I want the government to 
do" mode to that of constitutional design. Though Mancur's work came after 
I took graduate economics at UVa (1966-9), it's just about the best 
application of it.


Book Review
by [14]Richard M. Ebeling, September 2000


Power and Prosperity: Outgrowing Communist and Capitalist
Dictatorships, by Mancur Olson (New York: Basic Books, 2000); 233
pages; $28.

MANCUR OLSON, who died in 1998 at the age of 62, was one of the most
insightful economic analysts of the political process. His most
original and important work was The Logic of Collective Action: Public
Goods and the Theory of Groups, published in 1965. He developed an
analysis of the political process that focused on the different
incentives within and between interest groups of different sizes. He
argued that the larger the group attempting to reach a collective
consensus, the less likely the effort will be successful. The smaller
and more cohesive a group, the easier it would be to agree upon a
course of action.

For example, suppose that in a society of one million people, 100 are
dairy farmers. And suppose that these hundred farmers form an
association to lobby the legislature for a minimum price for dairy
products that increases the price of, say, a quart of milk by 5¢. If
it was estimated that each of the one million people in the society
purchases two quarts of milk, then an extra $100,000 in revenue would
be earned by the members of the dairy association (two million quarts
times 5¢ extra per quart), or on average an extra $1,000 of revenue
per dairy farmer. Suppose that it was estimated that it would cost the
dairy association $10,000 to have a successful lobbying effort. Then
each of the 100 farmers would need to contribute only $100 to obtain a
$1,000 return through political plunder.

But why would the society at large, the one million people minus the
100 dairy farmers, not counterlobby to resist and prevent this
political plundering of $100,000 of their income? Because for each of
the one million individuals in the society, the cost of this
politically created income transfer of $100,000 is only 10¢ (two
quarts of milk purchased by each of the one million people at an extra
5¢ per quart equals the $100,000). The amount each individual would
save, 10¢, by defeating the dairy lobby would not be worth the cost of
contributing to an anti-dairy-farm lobbying effort, even if each
person's contribution to such an effort were as much as, say, 25¢ per
person. The concentration of benefits towards special-interest groups
and the diffusion of the burden or cost of the privileges among the
rest of the members of the society, Olson explained, are why it is so
difficult either to stop the growth of the interventionist-welfare
state or to actually reverse it.

Olson devoted much of his efforts in later years to analyzing under
what circumstances such networks of special-interest groups might be
weakened and defeated. His 1982 book, The Rise and Decline of Nations:
Economic Growth, Stagflation and Social Rigidities, suggested that
only major social upheavals, such as war, were strong enough to
shatter the political structures that perpetuate systems of privilege
and redistribution once they exist.

Power and Prosperity was the last work he finished before his untimely
death two years ago. He explains the origin of the state, the limits
of plunder under autocratic and communist regimes, the difficulties in
transitions from planned economies to market economies, and the
political and constitutional institutions essential for both the
establishment and preservation of individual freedom and free-market

The state and plunder

He argues that the origin of the state can be seen in the replacement
of roving bands of plundering thieves by a stationary bandit who
settles down to rule over a territory over a prolonged period. The
roving band cares nothing for what happens in the area it has looted
and then left behind. But the stationary bandit, who wants to live off
the conquered area permanently, has to take into the consideration the
conditions and the incentives of his subjects if they are to keep
producing and therefore creating something for him to plunder through
taxation year after year.

Thus, out of the taxes he imposes he must also, in his own interest,
to some extent secure his subjects' property rights, enforce their
contracts, establish a judicial system to adjudicate their disputes,
and even supply some "public goods," such as roads and harbors to
facilitate commerce. His goal is to extract the greatest amount of tax
revenue for himself at the least cost of respecting and enforcing the
property rights of his subjects, but he must offer some degree of such
security for his subjects. Otherwise, their incentive to produce the
wealth out of which his tax revenues come might be minimized.

Olson offers a fascinating analysis of how in the Soviet Union in the
1930s, Stalin manipulated people's incentives in such a way that even
though all private property in the means of production had been
abolished and wages kept low, individuals were motivated to exceed
assigned production levels. All extra income earned in the form of
bonuses or access to quantities of goods otherwise difficult to
acquire, by producing above assigned quotas, were tax-free (or equal
to a marginal tax rate of zero). But physical threats and financial
bonuses, to extract greater physical output from Soviet workers, could
not compensate for the fact that without market prices production
decision-making was fundamentally irrational, and over time coalitions
of bureaucratic interest groups, along with the senior leadership of
the Communist Party, manipulated and plundered the Soviet economy.

While democracies have certain fundamental institutional advantages
over autocratic or dictatorial regimes, the tendency for the
democratic process to degenerate into special-interest-group politics
means that often the degree of redistributional plunder can be almost
as harmful to the economic well-being of a society as under a
nondemocratic regime. Indeed, the difficulty for many of the former
socialist societies is that the new democratic political environment
is one that makes it easy for the obsolete and unprofitable industries
left over from the years of central planning to now form lobbying
coalitions to resist privatization and free-market reforms and to
extract subsidies to keep their workers employed at jobs making goods
that have no positive market value.

Markets and market relationships, Olson explains, emerge spontaneously
and without government support and enforcement. The discovered
potentials for mutual gains from trade create incentives for people to
develop and respect various rules of commerce and contract, even
without legal delineation and protection. He calls these
"self-enforcing markets." Such self-enforcing market rules and
relationships pervade all societies in which political regulations,
controls, and taxation generate the incentives for people to interact
in the "underground economy."

But there are many forms of market relationships that are difficult to
establish, delineate, and enforce without a formal legal structure in
a political community with the police power to protect rights, enforce
various types of contracts, and administer justice. Without this legal
order, the members of society may not be able to reap all the benefits
from a better-defined and more secure set of market associations.

The other ingredient essential for men to be free and prosperous is to
prevent both private and political plunder. The answer to this
problem, unfortunately, is least well-developed in Olson's book.

But what is clear is that he believed that to answer the problem of
political plunder it was every man's duty to understand why freedom
was essential to a healthy human condition and why the fallacies of
government interventions and redistributive schemes had to be
challenged and overthrown in the arena of political debate. The use of
our reason to explain freedom and free markets, he hoped, would be
sufficient to eventually defeat the forces of political power and

Professor Ebeling is the Ludwig von Mises Professor of Economics at
Hillsdale College, Hillsdale, Michigan, and serves as vice president
of academic affairs for The Future of Freedom Foundation.


    14. http://www.fff.org/aboutUs/bios/rme.asp


Constitutional Design: L2: Rational Choice and the Origins of Collective
Action and Collective Choice


VII. Rational Choice and the Mutual Gains from Collective Action.

A. Ordinary economic exchange is in many respects an ideal model of 
interactions between individuals. Exchange only takes place when both 
parties expect to benefit--that is to say when each person values the 
thing received more than the thing given up.

i. In a pure barter economy, exchange requires what is called a
coincidence of wants.

ii. The usual diagrammatic representation of the mutual gains from
trade is the Edgeworth box.

a. It bears noting, that accept for agreeing that potential gains to
trade exist, trading partners do not really engage in collective action.

b. Each "trader" simply maximizes his own utility by attempting to get
the best deal possible from the other.

c. The decisions remain private, no "cooperative" enterprise takes

iii. In the abstract models used by economists, the price system is
completely sufficient to solve all the coordination problems between
individuals. Prices
induce sellers to
bring products to the market in the pursuit of profit (P). Prices also
induce buyers
to allocate their money (budget) among goods to maximize their
personal gains from
trade (CS).

iv. Illustration: one can easily show CS and Profit (Psr) on the same
diagram, and see
that social net benefits are maximized in competitive markets
(ignoring externalities).

B. However, there are a wide range of situations where individuals
face a genuine
collective problem. In such cases, achieving a privately desired
result will require
coordinating several person's activities in a manner that runs counter
to their
immediate narrow self interests.

i. The classic representation of a setting in which private decisions
do not achieve the
best outcome (in the eyes of the players themselves) is the Prisoner's

ii. Since each person has an interest in minimizing their own time
spent in jail each has
an incentive to testify against the other.

a. (Note that regardless of what the other person does, each is
privately better off testifying
than not testifying.)

b. Testifying is said to be the dominant strategy of this game insofar
as it is maximizes a
"player's" payoffs (minimizes his or her losses) no matter what the
other person does.

c. The PD-result is said to the Nash equilibrium of this game. Neither
player can improve
his own position by changing his strategy (from testify to not
testify, in this case).

iii. The dilemma is that each would be better off if they had
cooperated, and neither
had testified against the other!

iv. Escape from such prisoner's dilemma games will require some method
of direct
coordination/contract between the parties, or an external enforcer
that changes the
payoffs to testifying against the other. (The Mafia's enforcers.)
the Prisoners Dilemma

vi. Of course, the classic prisoner's dilemma is good for society,
even though it is bad
for the prisoners themselves.

a. The greater society benefits from less expensive information about
who committed a
particular crime.

b. (This assumes that the two people caught are actually guilty--note
that incentives to
"confess" are not necessarily changed if both were actually innocent!)

c. In general, it is clear that both participants in a PD-game would
be better off if they coordinated their
behavior (agreed that neither would testify) rather than acting in
their immediate self interest
(and testifying against the other).

C. However, in the PD-games of most interest for this class the "PD"
outcome will not
be Pareto optimal for society at large.

D. The Pareto Criteria may be defined as:

i. Let A and B be "states" of the world (distributions of income,
production, locations
etc...) A is said to be Pareto Superior to B if and only if at least
one person prefers A
to B and no one prefers B to A. A Pareto superior move makes at least
one person
better off and no one worse off.

ii. State A is said to be Pareto Optimal (or Pareto Efficient) if and
only if no Pareto
Superior moves are possible. That is to say, a state of the world is
Pareto efficient
is there is no way to make one person better off without making
someone else
worse off.

iii. Note that in the PD game, the PD solution (Nash equilibrium) is
not Pareto
Optimal. The situation where neither testified (where they cooperated
with each other) is Pareto
Superior to the PD result.

Constitutional Design: L2: Rational Choice and the Origins of
Collective Action and Collective Choice

a. Puzzles: how many Pareto efficient outcomes are there to the PD

b. Depict a "social opportunity set" in utility terms, and note the
Pareto frontier and
possibilities for Pareto Superior moves from within the frontier.

VIII. Prisoners Dilemmas: Team Production, Externalities and Public

A. There are many social dilemmas in which the result of private
optimization is less
than the best that can be achieved by all affected parties.

i. DEF: An activity is said to generate an externality if it imposes
costs on third
parties not directly involved in determining the activity level in
question. An
externality is said to be Pareto relevant, if there are external
benefits or costs at the
margin (at the activity level chosen).

B. The PD-type of game matrix can be used to illustrate many of these

C. Examples include:

i. The shirking problem associated with team production: team members
choose the "shirk" or "work."

a. In cases were each person's marginal product is affected by the
efforts of other team
members, there are often incentives for all to shirk (to work less
hard than would be
mutually advantageous).

ii. The tragedy of the commons, in which a productive communal
resource is over
utilized in equilibrium.

iii. The case of "reciprocal" externalities, in which several persons
both bear external
costs themselves and impose them on others.

a. Illustrate the reciprocal externality problem with a PD game.

b. Note that the externality problem can also be illustrated with a
continuous strategy set using
a MB, MC, and external MB or external MC curves.

c. (Social surplus losses or unrealized net benefits exist at the
"uncoordinated" private choice
equilibrium, because external costs or benefits are ignored by the key
decision makers.)

d. (The usual result for negative externalities is excessive usage
relative to that which would
have been , e.g. a greater use level than is Pareto optimal.)

iv. DEF: A pure public good is a good that can be simultaneously
consumed by
many people. A pure public good is perfectly sharable in the sense
that no one's
satisfaction is reduced if another person shares the good. Examples
include national
defense, national parks (over some range of use), gravity, broad cast
radio and TV,

v. The case of producing (unexcludable) public goods is similar to
that of engaging in
an activity that imposes a positive externality. In such cases,
external benefits are
conferred on other persons--that need not be accounted for by the
person creating

a. The result tends to be that the pure public goods are under

b. Illustrate an abstract public good problem with PD game.

c. Illustrate the discrete "free riding" problem using defense of the
village, barn building,
swamp draining etc. with a PD game matrix.

d. Illustrate with a continuous version of the free riding problem.

IX. Several governmental policies can solve externality problems.

A. Indeed, one theory of the emergence of government is based on the
above sorts of
problems. The theory of the "productive state" argues that people
notice that
independent private decision making is not generating as good a result
as they can
imagine. So they band together and coordinate their activities through
some method
of collective decision making and enforcement.

i. In many cases, the required coordination can be achieved without
formal penalties
or other sanctions, because informal sanctions--status, honesty and
self discipline--
are sufficient to induce cooperative behavior.

ii. In other cases, especially those there are many people involved or
where the costs
are very great compared to individual advantage, some form of
collective coercion
(punishment) will be necessary to achieve the desired result.

B. The social contract theory of collective action argues that
individuals may agree to
be coerced (taxed, or other wise penalized for free riding) as a
necessary part of over
coming free riding problems in the team production and in the
production of public

i. Here a productive joint enterprise is formed by a voluntary
agreement of all affected

ii. Illustrate the "Den of Thieves dilemma" to show why enforceable
property rights
might be accepted by all parties (even thieves!).

iii. (E.G. theft takes time away from productive activities reducing
income for all.)

X. Some Quotes on the Emergence of Organization out of Individualistic
Anarchy: the Productive State and the Social Contract:

A. On the nature of anarchy: from Thomas Hobbes, Leviathan (1651)

i. "Whatsoever therefore is consequent to time of Warre, where every
man is Enemy
to every man; the same is consequent to the time wherein men live
without other
security than what their own strength, and invention shall furnish
them withal. In
such condition .. the live of man [will be] solitary, poor, nasty,
brutish and short.

B. From James Buchanan, Limits to Liberty, 1975.

i. "The state serves a double role, that of enforcing constitutional
order and that of
providing "public goods." This duality generates its own confusions
misunderstandings. "Law," in itself, is a "public good," with all the
problems in securing voluntary compliance. Enforcement is essential,
but the
unwillingness of those who abide by law to punish those who violate
it, and to do so
effectively, must portend erosion and ultimate destruction of the
order that we
observe. These problems emerge in modern society even when government
ideally responsive to the demands of citizens. When government takes
on an
independent live of its own, when Leviathan lives and breathes, a
whole set of
additional control issues cone into being. "Ordered anarchy" remains
the objective,
but ordered by whom? Neither the state nor the savage is noble, and
this reality
must be squarely faced.

C. From Mancur Olson, "Anarchy, Autocracy and Democracy" (1991)

i. "The conqueror of a well defined territory has an encompassing
interest in that
domain given by the share of any increase in the territorial income
that he collects in
taxes. This encompassing interest gives him an incentive to maintain
law and order
and to encourage creativity and production in his domain. Much of the
progress since the discovery of settled agriculture is explained by
this "incentive."

XI. The Productive State

A. The above model of public goods and collective action provide the
basis for a
theory of the productive state.

i. Individuals voluntarily agree to create an organization with the
power to coerce
certain forms of behavior to solve various "PD" like problems of
collective action
and perhaps also coordinatrion problems.

a. Collective enforcement of property rights can mitigate "the den of
theives" dilemma.

b. Taxation can provide the resources necessary to finance the
production of desired public
goods are produced (national defense, law enforcement, transport
system right a ways, etc).

c. Regulations backed by sanctions can reduce externality and commons
problems (pollution,
high way speeds, and so forth).

B. Any form of collective action requires a method for making
collective decisions.

C. Obviously, if a group undertakes to form a state, they must also
make some
decisions about how collective choices will be made.

i. Even if there is unanimous agreement to provide a particular
service, or enforce
some property right or rule, there may not be unanimous agreement
about the level
of service or enforcment that is appropriate, or best.

ii. Appointing one person--a "leader," king, or dictator--to make
decisions in a
particular area is one such collective decision procedure.

a. However, the person appointed "leader" still has to be chosen.

b. And, some method for replacing him or her would, in most cases, be
another collective

iii. Majority rule is another possible rule for making such choices.

iv. We will analyze implications of that rule beginning next lecture.

XII. An Alternative Theory: the State as a Stationary Bandit

A. Before moving on, it is worth considering another theory of the
emergence of the
state and state services.

B. Mancur Olson notes that a good deal of what we have historically
observed as
governments have been significantly different than the voluntary model

C. He proposes an alternative model, based on the different incentives
of what he calls
"roving" and "stationary" bandits. The argument is based as follows:

i. Suppose that initially, there are a several roving bandits, each
with sufficient power
to sweep through a farm, village, or town, and steal what ever they
want to.

a. This may be thought of as a pleasant life for the travelling
bandit: of considerable riches
travel and comradery.

b. Although their lifestyles might be pleasant or not, the existance
of multiple groups of
roving bandits creates a number of problems for the bandit groups,
themselves, and also for their victems.

ii. The victems might organize for their own defense.

a. That is to say, potential victems may form a productive state, to
errect high walls, and guard
the gates, to keep the bandits out.

iii. If potential victems do not succeed in protecting themselves (or
fail to organize)
from roving bandits, incentives for investment and saving are limited.

a. Why save if you know that whatever you put asside for the future
will be taken by a roving
bandit before you get to use it?

b. Thus, farmers, merchants, and other productive people, would
produce and save less than
they would have in the absence of some form of protection from the
roving bandits.

c. (Show this with an expected benefit expected cost diagram.)

d. Life for both bandits and their victems would be poor!

iv. Another possible escape from the roving bandit dilemma is
suggested by Mancur

a. If no productive state or defense organization can be put together
by the victems, it is
possible that a very clever Bandit might realize that if he were to
take over an area and
exclude other groups of roving bandits from that area he or shee would
be wealthier.

b. Rather than ten bandits "sharing" the "take" from a village in say
differnt months of the
year, a stationary victem can take it all.

c. This reduction in the number of other bandits is the direct
advantage of being a stationary bandit.

d. There are also indirect advantages associated with being a
stationary bandit.

e. Note that roving bandits have incentives to take all the wealth
that they can lay their hands
on. (There is a PD game involving roving banditry.). Anything left
behind simply goes to
the next bandit that comes through the village.

v. A stationary bandit profits by taking less than "all that can be
carried away," because
because he or she can always return another day and collect it at a
later time. Taking
less than "all that can be carried away" has a very important
incentive affect.

a. Letting potential "victems" keep part of their harvest, livestock,
gold, and so forth, of
course has an effect on their incentives to accumulate such capital.
Instead of expecting to
lose all of their wealth to roving bandits, they now expect to be able
to keep and enjoy at least
part of it (at least for a longer time period than before).

b. This encourages potential victems to be more productive, to make
more long term
investments, to work harder, etc. etc. which increases the "tax
revenue" that the stationary
bandit can obtain.

D. Indeed, a clever stationary bandit will realize that he or she
should encourage
economic growth in "his or her" village as a means of increasing the
tax base and
his or her personal wealth.

i. He or she may invest in a legal system, in roads, and even in
education as a method
of making his village wealthier and thus a better source of tax

ii. That is to say, the stationary bandit becomes richer becasue his
potential victems
become richer.

a. (Show figure of a Laffer curve, linking tax/take rates with work
and output level. )

b. (The incentive to provide public services can be characterized in a
diagram that shows the
"tax revenue" maximizing service level.)

c. (Note that the optimal service level varies with the tax rate.)

d. (The greater the tax rate at the margin, the greater is the
"encompassing interest" of the
dictator in the wealth of his domain.)

E. A stationary bandit, has what Mancur Olson calls an encompassing
interest in the
welfare (at least wealth) of his potential victems because he can
profit by making
them wealthier.

i. Mancur Olson, "Anarchy, Autocracy and Democracy" (1991) argues

ii. "The conqueror of a well defined territory has an encompassing
interest in that
domain given by the share of any increase in the territorial income
that he collects in
taxes. This encompassing interest gives him an incentive to maintain
law and order
and to encourage creativity and production in his domain. Much of the
progress since the discovery of settled agriculture is explained by
this "incentive."

F. (One major problem with the Olsonian model of dictatorship is that
it ignores the
security problems that dictators face. Sometimes there is a trade off
increasing the wealth and welfare of "his or her" citizenry, and the
risk that "he or
she" will be over thrown.)

G. The idea of an emcompassing interest is very important in other
applications as well.

Clearly, a person whose own direct interest is advanced whenevery
"your" welfare
improves will be a better representative/zar/agent than one whose
interest runs at
cross purposes.

i. The elected leader of a democracy may be said to have an
encompassing interest in
his country if his or her prospects for reelection increase as the
nation prospers.

ii. A Mafia Don may have an interest in "law and order" within his
domain. (Protection
fees can be higher when the value of commercial activity increases.)

H. Although the smaller one's share in the fruit of a collective
enterprise, the smaller is
one's encompassing interest, it may also be applied to understand some
behavior by
individual members of a family, clan, club, interest group, or

i. Encompassing interest explains, for example, why some forms of
employee stock
options and other forms of ownership as in a cooperatives may work.
(Again the
encompassing interest would generally not be complete, so other
incentive problems
would remain.)

ii. Politically, it may partially explain why citizens often care
about such abstract ideas
as GNP or average income, insofar as their own income is correlated
with those
macro-economic variables.

iii. It may also explain, or at least help explain, some forms of
publically oriented
behavior by individuals in may walks of life whose interest is somehow
tied to the
interest of a larger organization.

iv. To some extent, voting in a democracy may also be tied to
individual perceptions
that the welfare of their country is enhanced by thier vote, which in
turn makes
them better off.


Predatory State - The Black Hole of Social Science


[1]Sauvik Chakraverti
[2]Times of India, September 22, 1999

It is very easy to prove that the socialist democratic Indian state is
a predator: a kleptocracy. Read on.

The term predatory state has been around for quite some time. Deepak
Lal probably used it first, intending to classify regimes between two
poles: the Platonic Guardians and the Predatory State. George Ayittey
has for many years been writing of the vampire states of Africa. But
these analyses ran into a stumbling block: the great political
economist Mancur Olson ruled out the possibility of predatory states
existing. Since Olson is not one to look at states with rose-tinted
glasses, his objection to the term is worth recounting in detail.

Roving Banditry

Olson's analysis begins by looking at how the state emerges out of
anarchy. Under anarchy, what happens is 'uncoordinated competitive
theft' by groups of 'roving bandits.' This destroys the incentive to
invest and produce. It makes sense for one of these roving bandits to
destroy the competition, set himself up as dictator, and 'rationalise
theft in the form of taxes.' The state as 'stationary bandit.'

In Olson's words: In a world of roving banditry there is little or no
incentive for anyone to produce or accumulate anything that may be
stolen and, thus, little for bandits to steal. Bandit rationality,
accordingly, induces the bandit leader to provide a peaceful order and
other public goods for its inhabitants, 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.

Olson denies that his autocrat, Mr. Stationary Bandit, can be called
predatory: (The Stationary Bandit)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 metaphor of predation obscures the
great superiority of stationary banditry over anarchy and the advances
in 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.

'Public goods' are those which cannot be priced and sold, or from
whose consumption people cannot be excluded like law and order, roads,
parks and, in the old textbooks, lighthouses. These are areas where
private money will not come in simply because private businessmen
cannot charge people for consuming them. Hence it is vital that public
investments are made in them. According to Olson, even a stationary
bandit would find it 'rational' to invest in public goods.

Olson's analysis makes sense to students of Indian history. The career
of the Afghan predator, Sher Shah Suri, can undoubtedly be analysed in
Olson's terms. He built the Grand Trunk Road (with serais all along
it) and provided law and order simply because by doing so he could
maximize his revenue: he could tax the trade that would naturally
transpire. Although he was a predator, the state he set up was that of
a stationary bandit; it was not a predatory state. The Mughal Empire,
which followed Sher Shah Suri was also similar in character.
Stationary bandits, all.

Private Goods

The socialist democratic Indian state is very different from its
predecessors. Judging by the situation on the ground, what we face is
an irrational under supply of public goods, especially roads and law
and order. The undersupply of roads has created what urban geographers
call primacy: the primary city bloating up while satellite towns do
not develop. This is the primary cause of urban overcrowding and
astronomically high urban land prices. Good roads would have colonised
more space. Roads, after all, are the only way of augmenting the
supply of land. Connect Village X to Town Y with a road, and that much
land is immediately available for the townspeople.

The law and order front is equally appalling. Traffic in India is
chaotic. VIPs hog police security while vast stretches of the country
face lawlessness: here, there is the uncoordinated competitive theft
of roving banditry. Would any stationary bandit countenance a Dara
Singh? Saket, an upmarket locality in South Delhi now famous for
double murders boasts a cine complex, three markets and three separate
residential areas: it still does not have a police station. No
stationary bandit would have neglected law and order thus.

When we examine the spending priorities of the socialist democratic
Indian state, which plans its investments, we see that they prefer to
invest in private goods: they make cars but not roads. They invest in
hotels, in steel, in civil aviation. They also spend money on rural
development, poverty alleviation and employment generation. Indeed,
they spend so much money on these things that they cannot control the
fiscal deficit. Yet, they cannot set up a roads fund. How do we
estimate the character of our rulers?

Extreme Prejudice

This is a predatory state. This is a kleptocracy. This is the black
hole of social science. It does not believe in maximizing revenue by
investing public money well and taxing free traders. It believes,
instead, in diverting public resources away from public goods to the
pet projects of bureaucrats and politicians: the spoils system.

What are we to do? We must radically alter the spending priorities of
the state. Planning must be done away with. All public enterprises
must be sold. The entire public treasure must be taken away from
private goods and re-invested in public goods. The roads of India must
get top priority. Policing must be drastically reformed and made to
deliver. Courts must be invested is so that justice is swift.

This socialist democratic state is unfit to perform any other task,
least of all educating our young. Ignorant people cannot become
educators. We must, instead, teach our children that the state is
their enemy, so that they rise against its kleptocratic policies. It
is time we terminated Indian socialism with extreme prejudice and
ushered in a Second Republic based on free trade, property rights,
sound money, public goods and sound reason.

Note: Kleptocracy means "rule by thieves".

New Delhi, Saturday, September 22, 1999


1. http://www.ccsindia.org/policy/philo/articles/people_sc_sauvik.htm



Editorial: Civil war and intervention


Having experienced a long civil war in England (and certainly knowing
about the one even worse in Germany) Thomas Hobbes published his book
on human nature and the necessity of governments in 1651: Leviathan.
The natural state of human beings appeared to him as bellum omnium
contra omnes, Man as the most violent of all animals. "In such
condition," he wrote, "there is no place for Industry, because the
fruit thereof is uncertain; and consequently no Culture of the Earth,
... no Arts, no Letters, no Society." He saw the only way out of
barbarism in a contract which transferred the monopoly of power to an
absolute sovereign at the head of the state, and irrevocably so: the
violent masses must be legally incapacitated. J. S. McClelland has
pointed out how unfortunate it was that Hobbes' work, with which the
concept of the social contract attained its actual meaning for the
philosophical debate on state powers, at the same time devalued this
concept: "Hobbes makes out a social contract case for the absolute
government which the social contract had been invented to undermine."
However, by that McClelland leaves open the question of how else can
such barbarian civil wars be ended.

What is happening today in many parts of the world, particularly in
Africa, is very similar to the civil wars of the 17th century in
Europe. And once again it offers a case for theories on the origin of
the state. In his last book, published posthumously in 2000, Mancur
Olson proposed the metaphor of the roving bandit for the situation of
disorder before the stabilisation of a state. Jörg Faust
described it so: “The plundering roving bandit strikes ever new
areas and therefore is not interested in the well-being of the local
people. He becomes a stationary bandit when he realises that it pays
better to raise taxes from always the same people. Now he must take a
great interest in economic growth because it increases his tax
revenues.” So the stationary bandit is the state as a benevolent
dictator that guarantees legal security, but by no means the civil
freedoms whose emergence Olson describes in a later chapter. But is
his metaphor at all suited to portray today's conditions?

Olson's stationary bandit is the ruler over the farmers and craftsmen
that he taxes and the traders on whom he imposes road tolls. He must
set great store in peace prevailing in the land – otherwise there
would be fewer taxes and customs duties. But that was in the Middle
Ages. The warlord of the 21st century, monopolising the trade in
diamonds or coltan for his private profit or to pay his mercenaries,
promoting the cultivation of poppies or concluding a contract with a
foreign corporation on the exploitation of oilfields, does not need to
bother about the rest of the country. He does not need it, and the
people are saved from starving by international humanitarian aid. The
economic sources from which the actors of today's civil wars finance
themselves are not farmers and craftsmen but those of a selective and
segmentary economy. That is not how a national economy comes into
being, nor a nation or a society. “No Society” – in
this respect the present diagnosis tallies with that of Hobbes.
Whereas Olson saw self-healing forces as being inherent in his model
because a peaceful society yields greater profit for the ruler, there
is no question of that amid the reality of today. Rather, an 'intact'
society would be inconvenient for the warlord's profit. However, since
the civil wars have considerable external impacts and result in
unbearable misery for the people affected, these countries cannot
simply be left to themselves. The international community must
intervene and establish peaceful conditions. They must take over the
monopoly of power if no state is in place on the ground. A state
cannot be established by a social contract, but only by an
intervention from outside. And, equally important, it must be ensured
that the international business partners of the warlords – the
industrial corporations as well as the drug traffickers – be
called to account.

If this analysis is right, then it does not help to send troops to end
current fighting at the respective places and lay down that they
should be withdrawn after a few months. If all these civil wars are
about resources they would flare up again the moment the foreign
troops have left. Therefore the objective of the intervention must be
to establish functioning institutions and a sound economy. But that
means that intervention must be designed for the long term and be
equipped with more than military means. Lakhdar Brahimi, in his report
of August 2000 on UN peacekeeping operations, demanded the Security
Council should not authorise any missions until the UN had sufficient
troop strengths and money. This demand is significant, but does not go
far enough. Funds for the reconstruction of the society must also be
provided. Peace, as we can see in Afghanistan and Iraq, is not
established by combat and occupation troops. How it can be
established, we know not yet. But the attempts to help peaceful
reconstruction and allow the people their own responsibility are
heading in the right direction.

Reinold E. Thiel




William Kovacic[2]**

2000 L. Rev. M.S.U.-D.C.L. 9

I want to speak about approaches for inducing public bodies to keep
their regulatory promises. In other words, how to make the commitments
that public regulatory authorities make credible. I'd like to go about
this by focusing on five discrete topics. First, I want to mention a
couple of key features of the regulatory environment and the types of
promises that public regulators make. I want to talk a bit about the
weaknesses of the state as a promise maker. I want to talk a bit about
legal limits that now confine the discretion of public decision makers
when they think of straying from the promises they make. I then want
to talk about the limits on these legal limits as tools for limiting
discretion. Then, I want to focus on some alternatives that go beyond
the possibilities for judicial enforcement or reliance on
constitutional or other statutory principles for limiting the
discretion of government decision makers.

Let me start my mentioning two features of the government's promises
as a regulator that are important to keep in mind. The first is that
when the government promises, especially in the context that Professor
Baumol[3]1 has just mentioned, it is often inducing its counterparts
to make long-term investments that will carry on over a substantial
period of time, the payment for which will only take place in full at
a later time in the evolution of the relationship. In technical terms,
the parties who are performing in response to the government's
commitments are making investments that aren't easily transferable to
another area and they are going to make the investments before full
payment is made. That is, in effect, what the government is saying is
"make substantial investments, we'll pay you for them in full later

This creates a couple of difficulties. These tend to be long-term
contracts so that when conditions change, there is a great temptation
to renege on the original commitment. In addition, in different
instances there may be a temptation when you know your counterpart has
made the large investment that's really only good for the relationship
with you, there is a temptation to renegotiate the price that you
originally agreed to pay.

The second basic characteristic deals with the nature that the
regulatory agreement takes. Professor Baumol referred to the
regulatory compact. Well, what is the nature of the agreement or
contract that the government makes with the parties it regulates? In
many instances that contract is not a single fat door-stopping text of
the kind we might ordinarily associate with contracts or agreements.
This instead has what Victor Goldberg and Oliver Williamson have
called "strong relational features." The basic commitments aren't
reduced to a text. If anything, the basic commitments are large
general principles and the specific operational detail of what people
do day in and day out are not established by individual text. They are
established as a result of a continuing interaction between the
regulator and the regulated enterprise and in many instances the
content of those understandings isn't committed to paper. It is the
result of conversations, spoken assurances, and ways of doing things.
In short, these agreements, these promises tend to be fluid, they tend
to be adjustable, and in many respects they are not committed to the
type of formal text that courts feel comfortable enforcing.

Let me turn to weaknesses that the government encounters in trying to
enforce these promises and to fulfill its commitments. The first has
to do with the incentives of the government decision makers. Compared
to their private sector counterparts, public officials, regulatory
agency heads, and professional staffs, tend to have weaker incentives
to fulfill their promises than the private sector counterparts. The
differences in incentives in particular between those that motivate
private decision makers and public decision makers. A problem for all
governed institutions is to provide the correct incentives for their
agents to make and fulfill promises. So, I am suggesting to you this
is a problem whether we were talking about the private sector or the
public sector. I simply mean to suggest that in many respects the
dilemma for the public sector is somewhat more acute. That is, the
public decision maker has, generally speaking, weaker incentives to
make optimal choices about the making and the performance of promises.

That leads to the second consequence that I had mentioned which is
that the reputational effect of breaking promises, and the
significance of reputation as a constraint is simply weaker in the
public institution because the individual public decision maker isn't
going to feel the same effect of reneging on a commitment. What are
some of the legal curbs on opportunism that operate in the public
arena? We have constitutional controls involving the breaching of
contracts involving uncompensated takings of property, a Commerce
Clause that at least nominally is designed to prevent individual state
jurisdictions from imposing significant externalities on other
jurisdictions, and the First Amendment that imposes constraints on the
ability of government to limit speech.

As a group, these serve the purpose of what Manser Olsen would have
called converting a bandit from being a roving bandit to a stationary
bandit. The roving bandit simply robs you and robs anyone who comes
by, takes what they have. The stationary bandit realizes that a
pattern of rampant unmitigated theft causes fewer and fewer people to
come and reside in the jurisdiction - and if you aim to stay around
for awhile, you don't want to simply take everything they have. You
realize that tax rates of 100% or greater tend to discourage
investment. You want to use a taxing approach or a regulatory approach
that is not so severe.

The last item that I've mentioned here, a form of constraint, consists
of the application of contract law principles, traditional contract
concepts, that would hold the government in violation of its
agreements when it breaks its promises. The Windstar litigation is
perhaps the most recent formative event, but there is an equally
significant case I think before the Supreme Court this term involving
Marathon and Mobile Oil, a case that involves the inability of those
companies to drill on leases that were acquired from the federal
government in which the claim is that the federal government's failure
to fulfill a commitment made it impossible for them to drill. The
companies are requesting the restitution of the amounts paid. The
Court of Federal Claims said "yes," the Court of Appeals for the
Federal Circuit said "no," and in the relatively near future, the
Supreme Court will decide the extent to which traditional contract
principles circumscribe the ability of the state the renege on those
types of commitments.

Let me mention some limits of these limits. I think that these have
greater constraining influence than they did twenty years ago, but I
am going to suggest to you that there are respects in which the
constitutional controls in many ways are relatively feeble checks upon
administrative discretion.

The first that I mention here is the role of sovereignty. Imbedded in
a number of existing cases is an extraordinarily broad view of the
sovereign, and the problem comes up in this instance: Suppose I'm
notorious for breaking my promises. How can I go about getting you to
do business with me? I have to give you a hostage usually. I have to
make and extraordinary commitment to you that in many respects gives
you the ability directly to punish me if I stray from the course,
because why else will you deal with me? I've developed a notorious
reputation for not fulfilling promises. Why should anyone else come to
rely on my promise? How do I get you to do that? I give you a hostage.
Some notions of sovereignty imbedded in the Supreme Court's
jurisprudence on this issue, I think effectively preclude or could be
interpreted to preclude the federal government from making that kind
of promise. In effect it makes, as an immutable principle of
contracting with outside parties, it makes it impossible for the
government to say "I know I've been bad. I know I'm unpredictable. I
know I might change my mind, but to get you to deal with me I simply
waive all of the defenses that I've used in the past to avoid being
sanctioned for a breach of contract. I give them all away." You can
read the case law as saying that the government lacks the ability to
make that kind of commitment.

A second complicating factor is the extraordinary implication of
federalism and the bifurcation and multiplicity of decision making
sources that we have seen referred to earlier today. It means that if
I want to contract with the state, I have to realize that the state is
not a unitary institution. It has federal components. It has state
government components. In the case of cable television and the City of
Portland, it has local municipalities asserting the right to exercise
control over transactions involving cable system operators. It simply
means that if I want to contract with the state, I have to contract
with a multiplicity of parties that makes it more difficult to invoke
this regime.

It is also important to note the relational features of the long-term
contracts that I referred to before. Suppose I'm a private
instrumentality and I want to assert that the government has violated
a promise, has breached a promise, especially the kinds of regulatory
compacts that Professor Baumol was referring to in his presentation. I
simply want to suggest to you that proving the existence of those
agreements and proving their content could be extraordinarily
difficult in most instances. Why? Because the way in which the so
called "agreement" has arisen is a relatively informal process of
accretion and adjustment over time, and it may be very difficult to
satisfy the comparatively rigorous standards that courts have
established over time to prove the fact of the agreement.

I might think I have an understanding and I very well might. I might
be exactly right in my contention that the public instrumentality has
given me assurances, has encouraged me to act in a particular way, but
it has taken place in the context of a process of a relational
adjustment in which courts have been extraordinarily reluctant to
intervene. Yes, those of you who want to think back to happy days of
contracts from the past can recall, you can sum into mind specific
cases in which courts have intervened to make relational
understandings binding requirements, but they tend to be unusual. The
simple point here is that proving these agreements to the satisfaction
of the court in the context of a breach of contract case in many
instances will be perfectly unattainable.

I would also mention the fact that adjustment goes both ways. That is,
there are instances in which it is the private party, of course, that
wants the benefit of the adjustment. Think of experience with price
caps in which in some instances, firms that have committed themselves
to excessively ambitious productivity targets have come back later and
said "we erred, we want a relaxation of the target." The counter point
of course is that where the productivity accomplishments are heroic
and robust, you have the public party saying "we want some of the
money back." In short, it is very difficult in this context to have
assurance that the commitments are going to be fulfilled.

Let me finish by talking about several alternative strategies, and I
want to simply finish by focusing on three of them. What happens if we
assume the traditional contract enforcement is not going to be a
terribly effective constraint in many instances? That the interactions
between the regulated firm and the regulator don't give rise to
confidence that a court might have in finding a binding obligation and
to put it into place? Let's suppose also that the constitutional
constraints that we mentioned before, that I do think are important,
far more significant today than they were twenty years ago, are still
relatively weak checks upon the discretion of legislatures or
individual government bureaus. What might be the alternatives that
assume greater significance in governing the relationship between the
state and those subject to its oversight?

The first suggestion I want to offer is reputation. Those of you who
read the literature on contracts are familiar of the work of scholars
such as McNeil and McCauley, who in their interviews and analyses of
the way in which private business operators behave in the context of
private commercial contracts, emphasized that it is not the bare terms
of the text that governs their behavior. It is the understanding, the
trust, the friendship, the relationship between the parties. It is the
trust that goes with the handshake. That's what governs the behavior.
It is the reputation of your counterpart, not their fidelity to the
precise requirements of each individual text. You might imagine an
environment in which individual jurisdictions over time become rated
according to their reputation. You could put them in three baskets.

You could have a jurisdiction that basically establishes a reputation:
"I never renege, I always fulfill my commitments unless I have an
extraordinarily good reason for deviating," one that an outside
observer would regard as credible.

In a second basket would be the regulatory authority or the state
institution that says "I always try in good faith to fulfill my
commitments. I don't always fulfill them, but you can be confident
that I'm always trying to do so."

In the third basket you could have a regulator who says, "I break my
promises whenever it suits me." That is, "You can deal with me, but if
I feel like it, when the temptation is great, the spirit is always
willing, but the flesh is weak, I always lapse. I especially lapse, by
the way, when you make firm specific transactions, specific
investments, and I can appropriate them. I really like to renege then.
And, oh yes, if circumstances change and consumers want something else
I run for the exits then and leave you holding the bag. That's what
I'm like."

You could rely on a system in which more rigorously, more
systematically over time, individual jurisdictions and authorities are
rated according to their fulfillment of commitments over time. To make
this work, I think we need a couple of adjustments in the public
policy arena.

The first is you would need a bit more transparency about the
relationship between the regulator and regulated firm in order to fill
out the report card. That might take the form of doing ex post audits
of individual regulatory episodes. It would require a willingness by
both the regulated firm and the regulator to submit themselves to a
more probing review of outsiders to evaluate what went wrong, in order
that you can assign responsibility. But one way to cope with the
contractual uncertainty that accompanies other approaches to
fulfilling promises, one would simply be to make, on a jurisdiction by
jurisdiction basis, reputation a more important constraint.

A second approach is to exploit the fact of competition and
multiplicity across jurisdictions to make the reputation effect
important. That is, you can imagine an environment in which certain
norms, the kinds of norms that Barbara was offering this morning, are
held up as best practices. Individual jurisdictions can opt into the
norms. They're not compelled to. This is not a treaty. This is not a
statute that commands them. But you might see developed over time, in
the work of centers such as the Quello Center, conferences, work by
individual academics, trade associations, you might have identified a
set of order regarded as best practices. Maybe you look at the
experience with stranded costs as being one informing opportunity to
see what that code might look like.

Where do the norms come from? In part, an assessment of past
experience, but the norms are held up for regulators to observe. And
where you have mobile capital, and you have opportunities for
individual business decision makers, in effect to sanction
jurisdictions that ignore best practices, you might see changes in
investment pattern. You might have individual jurisdictions saying,
"Even though we retain and principle the ability to renege on our
commitments, we are not going to do it. We are going to opt in to the
norms and the best practices."

A related way of accomplishing this is a very informal process of
osmosis. In looking at experience with emerging markets and comparing
emerging markets to experience with developed market economies, one
notices that one of the most crucial mechanisms for gaining acceptance
of specific norms is an informal process of absorption adjustment
debate - through professional associations, through forums such as
this one, other approaches by which individual norms way of doing
business gain acceptance. You can't rigorously trace the effect of
these activities on the behavior of individual regulators. But simply
a process of discussion or debate, gradually over time, I think has a
possibility for changing behavior.

I'll finish simply by pointing out one other possibility. That's that
looking ahead prospectively, that regulated firms insist on much more
specific contracts with their regulators. A common approach in common
law contract interpretation, interpretation under the UCC, is that
when you have an accident where risks have been established, a default
rule has been chosen, you then have a process whereby parties in the
future contract around that, modify that. Perhaps the solution for
many regulated firms in the future, before they make the long term
sunk investment, that's idiosyncratic to specific transactions, that
isn't easily portable, that's vulnerable to some form of manipulation
after the fact, maybe firms contemplating those investments must
insist on a much more specific recitation of responsibilities. The
cost of doing that is a loss of flexibility, and if you look back
again to the Goldberg, Williamson literature on relational adjustment
as a key ingredient of the partnership, the virtual partnership,
between the regulated firm and its regulated overseer, the more fully
specified contract can become an impediment to making adjustments over
time that are useful to the firm. But I think in many respects, these
possibilities may be every bit as important, may be more important,
than the formal legal constraints that we've been discussing today.


* This text is from a speech delivered at the inaugural
Telecommunication Policy and Law Symposium, held jointly by The Law
Review of Michigan State University-Detroit College of Law and the
Quello Center For Telecommunication Management and Law at Michigan
State University, on April 18, 2000, in Washington, D.C.

** ** William Kovacic is a Professor of Law at George Washington
University Law School. Professor Kovacic received his B.A. from
Princeton University and his J.D. from Columbia University.

1.See William J. Baumol, Proper Investment Incentives, Stranded Cost
Recovery and Differences Among Industries, 2000 L. Rev. M.S.U.-D.C.L.



Bergson'ss Basic Hypothesis and the Soviet Archives: Insights from
The Political Economy of Stalinism

Paul Gregory

November 7, 2003

  Abram Bergson's writings on socialism addressed two themes: the
performance of the socialist system, primarily of the Soviet Union,
and its working arrangements. The most comprehensive attempt "to
grasp the nature of working arrangements for resource use in the
USSR" was his 1964 monograph The Economics of Soviet Planning.1
Bergson's first monograph, his 1944 The Structure of Soviet Wages,
was also devoted to the Soviet labor market.2 Bergson's writings on
working arrangements were anchored by his compelling interest in
welfare economics, which he applied to judge the "merit"
socialism: On this point, he wrote: "in order for resource use to be
fully rational economically, theory teaches that a community must
realize an U91economic optimum.'"3 Bergson searched for efficiency
rules in Soviet working arrangements not because he particularly
expected to find them: "After all, one needs some principles even to
discover that none prevails."4  To further his evaluation,
Bergson's  major concession was that "merit" could be judged in
terms of the planners' welfare function, which he expected to favor
investment and defense.

   Bergson wrote relatively little on the politics or power
relations of the Soviet system, but he did not preclude the pursuit of
non-economic goals, such as the furtherance of  ideology or
"personal satisfactions U85 derive(d) from administering the economy
through some procedures rather than others,"5 which means the
"fact that U91means' are also U91ends.'"6 Bergson did not
delve deeply into the relationship between socialism and dictatorship
(as did Hayek),7 but he did comment on more than one occasion that
totalitarianism has been predominant under socialism  although some of
its "advocates sincerely aspire to avoid authoritarianism"8

   Bergson wanted to test for decision making rules that would at
least "tend towards" or "approximate" economic efficiency
within the context of planners' preferences.  According to my
reading, he found some limited rationality in the Soviet labor market
and found, in the short term context of fixed coefficients, some
reason for hope for material balances. Bergson was operating on the
assumption that a dictator would be loathe to waste resources.

Models of Dictatorship

   The "socialist controversy" in which Bergson played an
integral role along with such luminaries as Barone, Mises, Hayek,
Lange, and Bergson has subsequently changed from information,
computation, and pricing problems to the  political economy of rent
seeking. The pioneer was  Hayek with his 1944 Road to Serfdom, who was
subsequently followed by political economists and public-choice
theorists. A unifying theme of the political economy discussion has
been the effect of rent seeking upon the principles of political
governance of socialist systems and the inevitability of

   Four models of dictatorship can be derived from this political
economy literature: The "scientific planner" is a generally
benevolent dictator prepared to turn resource allocation over to
planning experts, content to set only general rules and guidelines.
The scientific planning model is that heralded in the official Soviet
literature. An all-knowing Party (the dictator) plays its "leading
role" but leaves the concrete decisions to scientific planners, who
use scientific norms and mathematical balances and to achieve the
"best results" for society.9 The second model is Mancur Olson's
"stationary-bandit," based on Stalin as the exemplar.10  The
stationary bandit  has a long time horizon and must behave in an
economically rational manner. The stationary bandit is, in effect, a
"development planner," whose "best" strategy was to aim for
rapid industrialization, high investment rates, and the creation of an
autarkic economy. The "selfish" dictator's primary goal is
political power, which is achieved by strategic gift giving and the
buying of political loyalty. When confronted with choices, the selfish
dictator allocates resources to maximize political power not to
achieve the best economic results. The selfish dictator gains allies
by distributing the economic rents extracted from ordinary citizens by
coercion.11 The "referee dictator" mediates among the powerful
regional or industrial elites that may form quickly in an

   Bergson, Hayek, Lange and other participants in the socialist
controversy focused on  scientific planning or development planner
dictators, paying little attention to power  maximizers of
dicator-referees. The main thrust of Hayek's and Bergson's
writings was the impossibility of scientific planning by ordinary
humans (absent a "committee of supermen)."13  Bergson appeared to
focus on the stationary bandit, who set a high investment rate, while
leaving the consumer goods sector to be guided by lower administrative
bodies. It is important to identify the nature of the Soviet
dictatorship. Notably, the selfish dicator and referee-dictator imply
poor and perhaps unsustainable economic performance. The selfish
dictator sacrifices economic decision making for political and the
referee-dictator is overwhelmed by narrow interest groups.

The Soviet State and Party Archives: What Would have Surprised

   Whereas researchers had to search for tidbits of information
during the Cold War, those who continue to study the Soviet economic
system are now overwhelmed by an abundance of information from the
Soviet state and party archives that were opened in the early 1990s.
The archives are particularly rich for the period from the 1917
revolution to the early 1950s. These archives provide the very
documents that the Soviet dictator and his administrators used to
manage the economy more than sixty years ago and show how the
administrative-command system was created and then operated.14 The
major findings from this literature,15  provide the behind-the-scenes
glimpses of the nature of the administrative-command system and of the
dictatorship that ran it.

   Planners' Preferences: The basic rationale for replacing
markets with command is that an enlightened scientific planner or
development planner could alter the allocation of resources in an
enlightened manner and produce a "better" economic outcome. In the
stereotype of the model, planners' preferences are formed by the
dictator (Stalin or the Politburo) and are transmitted to a planning
agency that constructs a plan that must be fulfilled by enterprises.
Bergson's hunch was that the most important indicator of planners
preferences would be the investment plan that would set capital
formation proportions and the distribution of investment among
branches and regions.16

   The archives (primarily in the form of reports of Politburo
meetings prepared by Stalin's deputies) that the two consistent
"control figures" set by the dictator were grain collections and
the nominal investment budget distributed among agencies.17 The
dictator's other instructions had little practical meaning, even
though there was endless discussion among Politburo members on tons of
steel, peat, truck designs, freight loadings, and so on. 18  Despite
objections to investment targets in nominal rubles, agencies were
simply given "investment rubles," and no one appeared to know the
"real" investment that these  rubles produced.19 Once agencies,
such as ministries or republics, obtained their investment budgets U96
after a monumental political "battle for the plan"-- they were
largely free to spend them, as long as they appeared on the state's
"title list." The investment projects on the title lists lacked,
in many cases, cost estimates, despite clear cut rules requiring them.
Efforts of the dictator's agents (Gosplan, the finance ministry, or
the state bank)  to impose some sort of cost discipline were easily
rebuffed with charges that planners were sabotaging key state
projects. Bergson was correct in his hunch that planners would not be
able to look into cost records, but the real reason was not the
administrative burden, but the fact that producers could argue that
such intrusions diverted them from vital state tasks. Even the defense
ministry lacked the right and ability to examine the costs of

   Devolving Decision Making to Ministries and Regions: Bergson
assumed that Hayek's administrative burden problem might be
ameliorated by breaking down "the apparatus functionally and
geographically; it might even have regional offices to take local
conditions more fully into account," stating that "this is, of
course, what is actually done in the Soviet Union." Bergson was well
aware of the principal agent problems of "branch loyalties" and
"regionalism," and presumed that they might be handled "by
general directives to guide .. subordinates." 20

   Although we knew  of  serious principal agent problems of the
industrial ministries and enterprises since the classic work of
Berliner and Granick, we knew less about high-level principal-agent
problems between the dictator and the industrial ministries. The
archives show their extreme severity and the extent to which Stalin
personally recognized their dangers and fought against them.

The dictator's dilemma is that the number of trusted associates
is limited, but, in the absence of self-disciplining forces (such as
markets), major economic decisions must be made by reliable people.
But once trusted people were placed in positions  for which they were
held responsible, they represented narrow interests.21 Stalin insisted
on "encompassing" economic decisions and railed against rent
seeking activities, especially from within his own circle: "It is
bad when we begin to deceive each other."22 Stalin complained
bitterly about the "selfishness" of Ordzhonikidze (Minister of
Heavy Industry), who pressed "on the state budget on the working
class, making the working class pay with its currency reserves for his
own inadequacy,"23 and that the "use of [foreign exchange] funds
must be discussed in the interests of the state as a whole not only in
the interests of [Ordzhonikidze]."24  Stalin particularly loathed
the selfish deputy minister of heavy industry (Piatakov), whom he
accused of "turning our Bolshevik party into a conglomerate of
branch groups."25 Stalin berated trade minister Mikoyan for
proposing a grain reserve for his trade ministry: "Why such
unlimited faith in the trade ministry and such limited faith in the

These quotes showing Stalin as  a lone stationary bandit fighting
vested interests, could conceal the work of a selfish dictator. The
Politburo and Central Committee were torn by conflicting interests.
With limited investment resources, each distribution of resources had
its supporters and opponents within the Politburo and Central
Committee. Indeed Stalin's correspondence is full of what could be
political payoffs. Kaganovich  was called to Moscow as a reward for
supporting Stalin's policies in Ukraine.27 Stalin had to referee
conflicts, such as between Kazakhstan and Western Siberia over
ownership of eight state farms.28 Molotov had to personally resolve
conflicts among regional Party bosses over who would get an imported
car. Stalin was uncharacteristically concerned in 1931-32 that his
native Georgia (and most solid power base) was "on the verge of
hunger" and of "bread riots," while In other regions, while he
made "feigning hunger" a counter-revolutionary offense. 29 Stalin
angrily ordered Mikoyan "to send grain to western Georgia and
personally see to its delivery."30 Stalin's anger at Mikoyan was
so intense that Mikoyan threatened to resign.31 Stalin listened
attentively to the lobbying of regional and local officials32 and
delayed the formation of separate union-republican ministries in
Georgia, Armenia, and Azerbaijan to avoid ruffling the feathers of
regional politicians, including his own supporter, L.P. Beria.33

Rules versus Ad Hoc Interventions: Narrow rent-seeking behavior
could perhaps be controlled by rules. As stated by Bergson:
"Presumably the Board [read: The dictator] would establish general
directives to guide its subordinates."34 A major surprise of the
archives is the dictator's aversion to general rules. Although the
administrative-command economy was a decree-based system, there were
few general rules and procedures, and any such rule or procedure was
subject to override by a superior. Each year or each quarter's
planning process was initiated by new guidelines (rather than the
simpler process of a general set of planning rules).35  No "plan"
was final; all were tentative and subject to intervention. The few
accounting and loan administration rules that existed were easily
overridden.36 Ministries operated without any charters that spelled
out matters of corporate governance.37 Hayek ruled out a rules-based
resolution of the paradox, arguing  that an administrative system
"cannot tie itself down in advance to general and formal rules that
prevent arbitrarinessU85It must constantly decide questions which
cannot be answered by formal principles onlyU8538 The Soviet
dictatorship constituted a nested dictatorship comprised of multiple
hierarchies in which the principal in each hierarchy could intervene
into the decision making of agents, while the agents themselves were
"dictators" of their own hierarchy of lower level subordinates
down through the hierarchy to the enterprise level.  If any of these
multiple dictators were obliged to follow "rules" their power in a
gift exchange economy would be lessened. If valuable resource were
allocated based on rules, the rule becomes the dictator not the
individual in the nested dictatorship.

   The general aversion to rules introduced considerable chaos into
the system. These dictators at the apex of the nested dictatorship
might make enlightened "encompassing" decisions, but those in lower
positions would make uncoordinated decisions based on narrow economic
and political interests. Moreover, Hayek's prediction about the
dangers of decision making without scarcity prices is seen in the fact
that each dictator had great difficulty in distinguishing the
momentous from the trivial. The fact that a small group of political
leaders (the Politburo) or one leader (Stalin) were making the
"key" decisions sentenced them to a life of toil, drudgery, and
boredom filled with endless meetings, petitions, consultations reading
of statistical reports, reviewing plans, distributing products, and,
for a change of pace, inspection trips. 39 Absences of Politburo
members had to be coordinated so that members were available to deal
with official business, and absence threatened the completion of vital
work. 40 The pressure of work was so intense that such threats of
resignation and pleas for lengthy vacations were commonplace. The
Politburo normally considered some 3,000 issues on an annual basis.
Numerous other participants were invited to and participated in
Politburo meetings as discussants or reporters. A representative
Politburo meeting, for example, on March 5, 1932,  had 69 participants
and 171 points on its agenda.41

   The greatest burden of all, however, fell on Stalin as he took
over more and more decision making responsibility.  Virtually every
communication from Kaganovich set out various options and then asked
Stalin for his opinion (vashe mnenie). Stalin was even asked to check
poetry and essays for their  ideological purity.  On rare occasions,
even Stalin would explode at this torrent of paper work, demanding
that his Politburo associates decide something themselves, such as his
tirade of September 13, 1933: "I won't read drafts on educational
establishments. The paperwork you are throwing at me is piling up to
my chest.  Decide yourself and decide soon!"42 Yet just a few weeks
after this outburst, Stalin berated the Politburo for distributing
tractors contrary to his personal instruction. Stalin to Kaganovich:
"I insist on my opinion!"43

   Stalin's correspondence mixes matters of great import with
trivia. In one communication, Stalin would order officials shot, the
minister of transport fired , issue instructions on foreign exchange,
order vast organizational changes, cut back investment, or order major
foreign policy initiatives. In another communication (often the
same),  Stalin would discuss the production of vegetables near Moscow,
whether a particular bridge should have one or two lanes, whether a
Soviet author should write books about Soviet industry, giving a Ford
automobile to a particular official, the depth of a canal,  sending
products to send to Baku, which articles published in various journals
and newspapers included ideological errors, the prices of  bread in
various regions, the fact that Pravda must report on a daily basis
automobile and truck production, and the renaming of a square in
Moscow. In a typical year, 1934 for example,  Stalin spent some 1,700
hours in private meetings, the equivalent of more than 200 eight-hour

   The dictator's curse was that, having the power to decide all,
his most trusted colleagues had the incentive to decide as little as
possible. Such a strategy minimized their risks. The less they
decided, the less blame they would have when things went wrong.  The
dictator, meanwhile, could not readily distinguish trivial from
significant matters and was reduced to being asked to decide

   Execution and Control: Bergson wrote that "even if the Board
could specify how every sort of resource should be used, the task of
controlling the execution of its directive would still remain,"45 a
statement that Stalin would have characterized as a gross
understatement. Stalin intensely feared that "the center's
directives will remain completely on paper" or that key agencies
"will not learn about the Politburo's decision, and it will get
bogged down in the bowels" of the bureaucracy. The most powerful
industrial minister declared that he had to "curse" and "act
like an animal" and "drive to hysterics" the ones who have to
carry out the directive in order to get things done by subordinates.
Stalin dreamed in vain of a "Commission of fulfillment" that would
force fulfillment of orders.46 Orders had to be issued through a
vertical hierarchy after preparation by agents, such as the State
Planning Commission, which was not responsible for bad plans and was
staffed by technocrats rather than party loyalists. An elaborate
system of monitoring the delivery and execution of orders was

   The ultimate problem of execution, however, was most of the real
resource allocation was carried out by the producers themselves. The
output and supply balances were prepared by the ministries and their
branch administrations. Even in the case of highly centralized goods,
such as vehicles, the power of the producer was surprisingly great.47
Decisions were formally made at a centralized level, but the actual
producers had the flexibility to make most of society's key resource
allocation decisions themselves. If resource allocation decisions are
being made by the producers themselves in the absence of market
allocation, it is hard to conceive a reasonable result.

   Arrow's Impossibility Theorem, Collegiality, and Brutality:
Whether or not anyone will ever wish to repeat the Soviet experiment
depends on whether it can be conduct under conditions of democratic
socialism. At a minimum, its appeal would require at least a committee
of wise men and avoid the dangers of brutality of a single dictator.
The "deal" which Stalin implicitly offered his Politburo allies in
December of 1930 was a political equilibrium of collective decision
making. In the early 1930s, Stalin could dictate decisions, he
considered vital but, if he went too far, the Politburo could still
rein him in. In violation of this implicit contract, the period 1932
to 1937 saw the marked decline of collective decision making. By 1936,
the Politburo was largely a consultative body. Other Politburo members
now referred to Stalin as the "master of the house." 48 Stalin's
personal secretary (Poskrebyshev) counted among the most powerful
figures in Soviet administration.

The path from a collective to a personal dictatorship clearly can
be explained in part by Stalin's thirst for total power.  But there
are several theoretical arguments in favor of the evolution to a
single dictator: Olson's stationary bandit model implicitly suggests
that only a single person (or a very cohesive small group) could
prevent the rise of vested interests. Hayek wrote of the tendency for
collective decision making to transform into one person rule under
conditions of administrative allocation:49 The  Arrow Impossibility
Theorem provides, surprisingly, a third rationale for the emergence of
a supreme leader.50 If we drop Arrow's non-dictatorship conditions,
the theorem still applies to a ten-person Politburo that it is
impossible to develop rules of social choice (should society choose A,
B, or C) that meet necessary conditions such as transitivity (A is
preferred to B and B is preferred to C but C is preferred to A) 51 In
such a setting, decision making requires some established procedure
U96 such as a fixed criterion, a random device (such as the roll of a
dice), or recourse to an arbiter -- when two alternatives tie for
first place. The Soviet Union, of course, was not a democracy in
December of 1930, but it had ten decision makers with differing
preferences." The arguments of Hayek and Arrow therefore seem to
provide reasons why an administrative-command economy will evolve into
a single-person dictatorship. In fact, a collective dictatorship may
be unstable and may yield inferior economic results.

   The archives show Stalin, willingly or forcibly, being thrust
into the role of arbiter or tie breaker in clashes within the ruling
elite. Three Party leaders nominated themselves to fill the vacant
position of transport minister, leaving it up to Stalin to make the
final choice.52 Unresolved issues were turned over to Stalin.
Kaganovich to Stalin (August 15, 1931): "We put off the question of
grain procurements [provides details]. We decided to delay until the
20th in order to receive your opinion."53 When Stalin feared that
Kaganovich could not handle the matter, he would suggest a delay until
he could be present: "I am against the import of steel pipes. If
possible delay the matter until autumn."54 When Ordzhonikidze
disputed a Stalin decision, Stalin sent him an ultimatum: "In the
case of your disagreement, I propose a special meeting of the
Politburo which requires both our presence."55

   A "dictator-referee" is unable to control vested interests.
The archives provide little support for the  revisionist view that
Stalin's major actions were decided by "bottom-up" influences of
pressure groups.56 Our reading of the archives yields a quite
different picture of Stalin as a master of orchestrating interest
groups when their support was needed. He relied primarily on placing
his own people in responsible positions, where he actively sought
mediocre but brutal loyalists. Stalin clearly played the role of
stationary bandit U96 particularly his willingness to take on his own
rent-seeking allies. Stalin had the insight to understand that the
greatest rent-seeking danger came from within rather than from
outsiders. Of course, Stalin, as a master politician, distributed
"gifts" to insure political support when it was necessary, but the
impression is that he sought to limit such gift-exchange activity.



   Power and Prosperity: Outgrowing Communist and Capitalist
Dictatorships by
  Mancur Olson

by [1]Tyler Cowen

>From [2]Humane Studies Review Vol. 13, No. 2

Power and Prosperity: Outgrowing Communist and Capitalist

Mancur Olson

New York: Basic Books, 2000, 233 pp.

Adam Smith, before he died, supposedly destroyed a good deal of
unpublished or incomplete writing. Franz Kafka, before he died,
instructed a close friend to burn his manuscripts. Instead the
manuscripts were published, and have since accounted for much of
Kafka's fame as a writer. The University of Michigan Press has just
published a manuscript by Julian Simon, which he had not completed
before dying.

Now Mancur Olson. These are Olson's final thoughts on liberty,
dictatorship, and economic growth, the problems that so preoccupied
him in the last few years of his life. But it is not a completed

Some time ago, Olson started work on the fruitful distinction between
a stationary and a roving bandit. A stationary bandit has some
incentive to invest in improvements, because he will reap some return
from those improvements. A roving bandit will confiscate wealth with
little regard for the future. Olson then used this distinction to help
explain the evolution of dictatorship in the twentieth century, and
going back some bit in time, the rise of Western capitalism.

I have never found this approach fully convincing. Is the stationary
bandit really so much better than the roving bandit? Much of Olson's
argument assumes that the stationary bandit is akin to a
profit-maximizer. In reality, stationary bandits, such as Stalin and
Mao, may have been maximizing personal power or perhaps something even
more idiosyncratic. Second, the stationary bandit might be keener to
keep control over the population, given how much is at stake. He may
oppose liberalization more vehemently, for fear that a wealthier and
freer society will overthrow him.

In any case, this volume presents and expands upon Olson's ideas on
these topics. Some parts of the book deal with property more
generally, or recapitulate Olson's earlier contributions. There is no
single rigorous presentation of theory, but rather a discursive
treatment, as if these were scattered lecture notes. Nor is the
evidence for and against the basic hypotheses presented
systematically. So it is a hard book to review and evaluate.

As for Adam Smith, we can only imagine what might have been. We are
glad for Kafka's friend. Julian Simon's last work is a mixed bag.

Had Olson lived he would have won, and deserved, a Nobel Prize in
economics. So what are we to make of his last writing, and its
publication? Those who know enough to tell the difference will admire
Olson sufficiently to avoid serious frustration or disappointment.
Those who do not know enough to tell the difference, well, cannot tell
the difference. In the meantime, Olson's name is put in front of more
people and marketed by a trade press. Surely this is still more
interesting than most of what is published. And I do not believe that
we can harm the dead through embarrassment. So this book is a Pareto
improvement, but a small one. If you are reading this review, you
already know enough to look elsewhere, if only to Olson's other
writings, for the greatest possible marginal edification.


1. http://www.theihs.org/libertyguide/people.php/21.html
2. http://www.theihs.org/libertyguide/hsr/index.php#13-2
3. http://www.amazon.com/exec/obidos/ASIN/0465051960/
4. http://www.laissezfairebooks.com/product.cfm?op=view&pid=EC8315



  WASHINGTON DC, Feb 20, 2005 | ISSN: 1684-2057 | www.satribune.com

  Roving vs Stationary Bandits: How Politicians Should Negotiate With
   the Army

  Dr Ayesha Siddiqa

  [INLINE] WASHINGTON, February 20: Pakistan's endemic problem of
democracy has created a general impression that there is an inbuilt
problem in the nature of the Pakistani state. If one compares the
system in Pakistan with that in India, political systems in both
countries are authoritarian and evince similar characteristics.

Luckily, India has managed to move along the track of electoral
democracy because of uninterrupted practice. This, of course, is a
functional explanation of the development of democracy.

The uninterrupted process of fair elections has long-term benefits
and can help improve the quality of democracy even when a system
might not have developed a democratic spirit. The process itself
helps political systems and states to get out of the medievalism
that still infests Pakistan.

But the question is: How does one get out of the logjam Pakistan
finds itself in? How does one ensure that this time round things
will be different? Are there any signs other than the words of the
beneficiaries of the current political system that there would be a
qualitative shift towards strengthening of democracy? The past army
chiefs-turned-presidents were equally persuasive in suggesting that
they intended to develop democracy. In fact, some analysts,
academics and other people think all army chiefs have actually
tried to support the cause of democracy in Pakistan.

While this is utter fabrication, it is hard to deny that forces
internal to the political process - i.e., political parties - are
to be equally blamed for the failure of democracy. Parties have cut
`under the table' deals and weakened democracy as much with their
irresponsible behavior as the force `external' to the process.
Besides the internal forces have contributed equally towards
inversing the patron-client relationship. Resultantly, the civilian
authorities have neither the power nor the ability to punish the
military if it `shirks' from its duty of obeying the political
leadership. This is because the military is effectively the patron,
not the client.

The `under the table' deals are inherently dangerous. This is
something that should be avoided at all costs. This is what I meant
when I suggested in an earlier article that political parties must
not negotiate with the military. Cutting deals only further weakens
the political system. Divided, the political and civil society
could never get strong.

This does not mean, however, that negotiation should not take place
at all. In fact, there is need to have a discussion between the
military and the political society. This, it must be mentioned, is
different from a one-to-one secret deal between a single group and
the khakis. Whatever should be demanded has to be on behalf of the
political society in which all parties or all major parties have a

There are four prerequisites to this approach:

First, it must be understood that the military enjoys total power
and the issue relates to negotiating power sharing. Considering the
current weakness of the political system, the military does not
have any major incentive to negotiate a power-sharing formula
unless there is a concerted effort from the other side to force it
to do so. Power sharing is not about the power of a single group
but getting relief for the entire system.

Second, negotiation would require a common framework to be decided
among the major political actors. This has to determine the future
flow of power and political norms.

Third, political negotiators need to put in an effort to
re-invigorate the parties and the political process. Political
parties must have the ability to reach out to people at the
grassroots. There is a whole list of things that could be
recommended starting from holding party elections to increasing the
number of paid members, to streamlining fundraising in the parties.
But political parties can only be democratized when their
leaderships decide to become less medieval in their approach.

Finally, political actors must be good at political mathematics.
This comprises the ability to do a cost-benefit analysis when
negotiating with the khakis. The military is politically
well-entrenched. Its to-ing and fro-ing from the barracks to
politics has changed its basic psychology, especially of the
officer cadre.

Today, for it politics is not just an issue of saving the country
but also protecting the personal and organizational interests of
the generals and the army. Institutionalized power base results in
Institutionalized interests that are always an amalgam of personal
and organizational interests.

The political forces have to know exactly how and what to negotiate
in the better interests of the nation and the people. Political
leaders might even realize that they would have to allow certain
benefits and privileges to the officer cadre in return for greater
civilian control in some areas, including transparency and
accountability. The military would not allow civilians' involvement
in its affairs until it can trust the politicians and can
communication with them.

Offering a perks package is necessary to win the confidence of the
officer cadre. This offer is akin to Mancur Olson's concept of
stationary versus roving bandits (Dictatorship, Democracy and
Development [1993]). According to Olson, settlements ravaged by
roving bandits can have the incentive to encourage a group to
become stationary. What the group used to take as loot the people
provide by collecting taxes and surrendering part of that money to
the stationary bandit. The bandit, on the other hand, realizes that
looting the town indiscriminately would ultimately exhaust its
financial capacity and becoming stationary would benefit both: the
bandit would get a steady supply and the people would get security
against other roving bandits.

Currently, the net cost of military perks is more than what the
government might spend in direct subsidies. In addition, there is
the opportunity cost of continued political underdevelopment. The
military would not return to the barracks unless it is convinced
that its privileges would remain intact. This includes both direct
and indirect privileges. An officer cadre threatened by the
withdrawal of direct personal privileges and downsizing would never
agree even to the rightsizing of the military or greater civilian
involvement in the defence sector.

However, negotiations cannot begin unless the political leadership
has done its homework and built its capacity. The homework includes
monetization of the perks of both civil and military bureaucracy,
assessment of the money required to pay for the perks and the
state's ability to generate such resources. This is a possibility
provided the state acquires the right to generate money from all
those resources that are now being privately managed by the

A number of models are available in the region where governments
have monetized the perks and privileges of the public sector. This
has also resulted in lessening medium to long-term financial
liabilities. The concerned governments no longer have to spend
money on depreciation of assets or the maintenance of assets. A
number of state governments in India such as Andhra Pradesh have
adopted this approach. Perhaps financial gurus like the current
premier-cum-finance minister might initially freak out at this
suggestion, but one is looking at a financial trade-off rather than
what would require both sides of the book to be evenly balanced.

Parallel to this the parties must train its members, perhaps a few
to begin with, in issues pertaining to national security, economics
and affairs of the state. What one is asking for is more than a
`hands-on' approach. Members have to be trained and groomed. Each
party could have a core group working on a set of issues. In
addition, greater debate within the core group is necessary.

For the military it is important to understand that there is
greater benefit or profit in (a) strengthening democracy, (b)
routing national military-strategic objectives through political
process handled by the political leadership, and (c) allowing
political agendas to take precedence over purely military
objectives. A politically less uptight Pakistan would bring greater
economic dividends that could allow the military as well as other
groups to reap the financial benefits.

Whether one takes the functional or structural approach to address
the cause of democracy's failure in Pakistan what is important is
to remember that we need to get out of this together. No one player
can strengthen Pakistan. But together we can.

The writer is currently a fellow at the Woodrow Wilson
International Center for Scholars in Washington DC. This comment
first appeared in The Friday Times.

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