Why do Richer Countries have Bigger States?
It's fast becoming a well-known fact amongst economists, but one which isn't often aired in public: there is a surprising correlation between the state and prosperity. And it's not a negative correlation. It's strikingly positive. Alongside the astronomical rise in living standards in western countries over the last two centuries, one thing stands out: the expansion of the state. Whilst the twentieth century is often associated with expanding markets and globalization, it also witnessed ever growing states.1 And, perhaps ironically, it wasn't a low-tax, low-debt part of the world that spurred the process of modern economic growth. It was high-tax, high-debt Britain that gave rise to the first industrial revolution in the late eighteenth and nineteenth centuries (see Figure 7.1) ‒ high both compared with Europe and Asia.2
Figure 7.1 Taxes in history: high-tax England vs low-tax China. Central government tax revenue per head (measured in the number of days an unskilled worker would have to work to pay the tax).
Source: Ma and Rubin (2017)
Not only does the time-path of history suggest that states and prosperity sometimes can go hand in hand, so too do comparisons across countries in the modern world. Indeed, some of the poorest parts of the globe lack well established and capable states. They tend to be fragmented and experience significant internal conflict, including civil war. As economists Noel Johnson and Mark Koyama point out, ‘[t]oday's richest countries possess both sophisticated market economies and powerful, centralized, states. In contrast, the poorest people in the world tend to live in regions with dysfunctional markets and weak or failed states.’3 As Acemoglu et al. note, ‘[i]t is now widely recognized that the weakness or lack of “capacity” of states in poor countries is a fundamental barrier to their development prospects. Most poor countries have states which are incapable of or unwilling to provide basic public goods such as the enforcement of law, order, education and infrastructure.’4 Even in the United States, where there is a tradition of arguing that the state is inimical to growth, there is increasing evidence of a link between the state and prosperity. That includes the work of Daren Acemoglu, Jacob Moscona and James Robinson, who, using postal stations as a proxy for state infrastructure in history, find a strong link with innovative activity, as measured by patents.5
So how do we explain the fact that many of today's richest economies also have big states? There are, in fact, three possibilities: that states can be good for prosperity; that prosperity leads to expanding states; or that there is a common factor that produces both.
The first of these possibilities is that states have learnt how to support prosperity. Markets are a necessary but not sufficient driver of economic prosperity, and, if the state uses its capacity to work with them (rather than against them), it can make an important contribution to prosperity. First, you don't have to dig too deep into any economics textbook to find all kinds of situations in which markets ‘fail’, along with a series of policy implications. Whether that's dealing with externalities such as pollution, funding public goods, including, as Marianna Mazzucato emphasizes, the science base, or making sure that everyone has access to education and training, allowing us to make the most of the most scarce resource our economy has: human talent. Furthermore, since care is central to economic activity, and yet is so often provided outside of the market and on a rather longer timescale to production, allowing the economy to free-ride on what has largely been women's reproductive and caring efforts, feminist economists would also suggest that the state has a role to play here too, both in terms of limiting the adverse implications for gender equality and in terms of making sure that care is not depleted in a way that harms us all in the longer term.6 Second, the same forces that create prosperity (such as technology and trade) also cause disruption for human life, the most obvious of which is the loss of jobs in declining sectors of the economy. A good state is one that can help make people resilient to this continued change and empowers them not only to make the most of new opportunities but to actively create them. If it does not, the process of economic advance can in fact exacerbate inequality and lead to a waste of human talent. Third, and as we saw in chapter 6, the state also has a more fundamental role to play when it comes to markets. Markets only work well, both to achieve prosperity and an equitable and sustainable outcome, if they are built on the right foundations: both formal ones (legal and political) and informal ones (family and society). Markets do not have an independent life of their own and can be redesigned to make them better deliver. Fourth, markets help to deliver prosperity in the long term but economic instability is to some extent inevitable along the upward path (see chapter 9). The state may have a role to play in helping alleviate such instability. Finally, prosperity is not, as we saw in chapter 3, guaranteed to lessen gender inequalities, which can feed back to hurt the economy going ahead. Economic growth in the short term cannot be assumed to deliver equitable or sustainable outcomes.7
However, although we can in theory see the need for state interventions, we also know that in practice a bad state can do more harm than good. States can themselves do great damage to the environment, take advantage of women's reproductive efforts (and limit their reproductive choices) and add to, rather than alleviate, instability.8 Ask any New Yorker about William M. Tweed, one of the most corrupt politicians the city has ever known, and you'd soon understand why Americans are in general much more sceptical of big government than are Europeans. It's difficult to deny the fact that big government can be bad for the economy, either directly by harming efficiency and productivity, as seen in the former communist bloc, or indirectly, as discussed in chapter 6, through the social conformity and lack of diversity that arises when markets are not available to support exchanges between people who have different social beliefs.
Size, in other words, isn't all that matters. The same-sized states can have very different effects: size can harm or it can help, depending on how ‘capable’ a state is. Where, for example, tax revenues are used to fund infrastructure that connects people or that supports their ability to engage in the market, it can have a beneficial effect. Where the same funds are instead used to build fancy palaces, suppress opponents or wage unnecessary wars, the outcome is likely to be altogether different. In a recent study of China, Yi Lu et al. found that the number of communist party officials in a region had a negative effect on economic activity before the introduction of market reforms in 1978, but it had a positive correlation with numerous measures of economic performance thereafter, including growth in agricultural output, mortality rates, educational outcomes and local infrastructure development. In their own words, ‘state capacity could indeed accelerate development, but the effect is substantial and unambiguous only when the state seeks to complement the market instead of substituting it.’9
So whether a state is good or bad depends not simply on its size but also on its capabilities. Recently, economists have introduced the concept of state capability. They define state capability as the capacity to collect taxes to fund public goods like defence and infrastructure and to enforce law and order across the nation's territory, in other words, in fiscal and legal terms. In addition to capability, they also point to the importance of constraints on the state. They argue that if it is to support the market, the state needs to support property rights, and that is more likely when the state is constrained to act in the will of the people through a system of political representation like democracy. Throughout history, we have seen time and time again the way that unelected monarchs have trampled on people's property, extracting wealth from minority groups ‒ or from those unable to vote. Political representation that acts as a constraint on the ability of a state to act in its own self-interest is, therefore, thought to be important.10
The way I think about state capability is, however, quite different to the way other economists tend to define it. It is instead about judgement: the ability of the state to judge which interventions are best for the economy, including the
types of laws, regulations and institutions that are required to ensure that the market delivers. Rather than being substitutes, the market and the state can, in the right circumstances, be complementary. However, the state can also overreach itself, suffocating prosperity. A capable state is one that can work out the difference. That is, unfortunately, not easy to get right ‒ which, of course, likely explains why capable states are quite rare. Having fiscal and legal capability is one thing, but the state also needs to be able to judge when and how best to use that fiscal and legal capability. Unfortunately, there is no straightforward recipe for when the state should or should not intervene. Ideology ‒ capitalist or communist ‒ isn't the best guide. Laissez-faire provides a simple hands-off approach but, in the words of John Ramsay McCulloch: ‘The principle of laissez-faire may be safely trusted to in some things but in many more it is wholly inapplicable; and to appeal to it on all occasions savors more of the policy of a parrot than of a statesman or a philosopher.’11
On the other hand, if a state is too keen to intervene without question ‒ if it is too ready to assume that markets fail and that intervention is always the answer ‒ it is likely to be captured by vested interest groups. Any intervention is, on the face of it, easy to market to a politician. Being a capable state therefore involves great judgement. In each and every case, the state needs to be able to judge whether it can improve upon market outcomes or whether by intervening it will make things worse. The relevant question should not be whether markets are failing but whether the state has the ability and knowledge required to improve upon the market outcome.12 Here there are no hard and fast rules. No wonder there are so few relatively capable states.
State capability should not, of course, be divorced from gender equality, something which, as we've already seen, is vital for building equitable and sustainable growth. Whilst the situation facing women in the West was historically somewhat more favourable than elsewhere, the state hasn't always helped.13 As Alice Kessler-Harris has argued, the ‘gendered imagination’ ‒ the association of women with domesticity and men with paid work ‒ led to a welfare system, tax code and the sanctioning of workplace practices (such as marriage bars and discrimination) that penalized those in the United States who did not fill their prescribed socially dictated roles.14 The twentieth-century welfare state operated on the assumption that women were dependents, supported by their husbands, giving them less favourable tax and pension treatment and presuming that they were available to pick children up from school halfway through the afternoon, acting as a constraint on labour market involvement. The trade union movement with its fight for ‘family wages’ also, like the state, served to crystallize the male breadwinner model.15 Population and immigration policies have also had consequences for women. No wonder, as Pedersen argues:
Welfare policies meet social needs but they also construct social norms and inflict social punishment: they can foster as well as ameliorate distinctions or inequalities. Welfare states provide entitlements: but to whom, and in what form, and under what conditions? When it comes to welfare states, the devil is always in the detail … Welfare states reflect social patterns but they also reify them, nowhere more than in the assumptions they make about gender relations and family life.16
More recently, feminist economists have pointed to the way in which structural reform packages in developing countries and the austerity policies that followed 2008 excluded any consideration of the very gendered effects, which took a particular toll on women.17
A state cannot be deemed ‘capable’ if it is blind to and perpetuates gender inequalities, which explains why feminist economists now push for ‘gender budgeting’: a consideration of the gendered consequences of each new state intervention. Now we might suppose that once a state opens its eyes to gender equality, it is relatively straightforward for it to judge what it needs to do. But, as Mala Htun and S. Laurel Weldon have shown by looking across a whole range of different countries, state interventions on the gender equality front are often highly inconsistent. Countries that are ahead in addressing violence against women (VAW) can also be quite backward in terms of labour market policies (like paid parental leave), family law (such as divorce and inheritance) and reproductive freedom (such as birth control and abortion). And vice versa. That is even the case for Scandinavian countries, the supposed pinnacle of success. To quote, ‘states can be both progressive and regressive … They can extend greater rights and freedoms to women and men with one hand while taking them away with the other.’18 Understanding why this is the case can help us to see why some states are more capable than others in gender terms.
Htun and Weldon argue that gender equality interventions can be categorized on two grounds: on whether they are doctrinal or not (i.e. whether they touch on religious doctrine, as family law and abortion do), and on whether they are ‘inflected by class differences’ (i.e. where they fit on the right‒left political scale).19 This categorization, which allows us to divide gender equality interventions into four groups, explains why states often make progress in some ways but not in others.20 The attachment (or dependence) of the state to religious institutions and its political inclinations (right versus left) will affect what states are willing and able to do in gender equality terms.
In sum, states can be either bad or good for prosperity: it all depends on how capable they are, where that capability should be defined to include gender. In the marketplace, competition helps to root out businesses that are incapable, thereby creating pressure for capabilities to be built; democracy and interstate competition could be seen as providing a similar device when it comes to states. Unfortunately, however, and as Stiglitz argues, democracy is not enough to ensure that the state is capable ‒ it also needs to be accompanied by, for example, an active civic society and a free press.21 When it comes to gender equality, evidence similarly suggests that democracy is not enough.22 Given that capability is difficult to build, and that democracy is not necessarily enough to push us in the right direction, we can start to understand why economies in which the state and the market work successfully together are in fact a rarity.
There is a second reason why we might find a relationship between the state and prosperity in today's rich countries: one of reverse causation. Increasing prosperity may lead to an expansion in the size and capability of the state. That's certainly how Avner Offer explains the escalating size of the state throughout the course of the twentieth century. As Offer argues, once we are rich enough to meet our everyday needs ‒ food, shelter and clothing ‒ we start thinking about investing in our long-term welfare, such as through health care, education and pensions.23 The only stumbling block is myopia. Because we are inherently short-termist, we do not always save enough for the future. In addition, we can be overly optimistic about what that future holds, meaning that we put too little aside. In Offer's own words, the state and the tax system provide ‘a commitment device which helps individuals overcome myopic preferences’. We actively vote to have our choices restricted in the sense of committing ourselves to the taxes that are required to cover the costs of our longer-term selves in an effort to overcome our short-termism. In other words, as the economy becomes more prosperous, we place more demands on the state ‒ and are of course better able to fund those demands. Unfortunately, however, when it comes to state capability as opposed to the size of the state, there is no guarantee that increasing prosperity will make the state more capable in gender terms. As we saw in chapter 3, there are times when increasing prosperity has come hand in hand with government regulations that have hurt as opposed to helped, particularly in regard to gender equality.
There is a third and final possible explanation for the correlation between the state and prosperity: that there is a common underlying factor that has produced both prosperity and relatively capable states in today's richer economies, one that may be missing in parts of the world that remain both poor and lacking in state capability. In other words, rather than thinking solely about how pr
osperity and the state affect one another, we should also think about outside factors that may have led today's rich countries to build economies in which we find states and markets working in a way that delivers a whole that is more than the sum of its parts.
In what follows, we therefore delve into the history of today's most capable states, looking at how they developed in a way that supported as opposed to hindered economic expansion. As we will see, it is a story that ‒ like so many others ‒ has left women out in the cold. By bringing women into the story, we will identify an often overlooked factor: women's freedom. We have already noted the need to bring gender to bear on how economists define and judge state capabilities; we still need to think more about how gender equality affects the chances of building a capable state in the first place.
The Invention of the Modern State
A (relatively) capable state is something we all too often take for granted in modern-day western countries. However, as Noel Johnson and Mark Koyama astutely note:
[f]or many premodern polities, even the term state is an anachronism: there was no state in much of Europe prior to the late middle ages … the word ‘state’ only came to acquire its modern meaning in English at the end of the sixteenth century. … This was not merely a semantic change; when ‘the word “state”, l’état, stato’ or Der Staat came into usage in the early modern period it was ‘a word for a new political experience’.24
Recently, economists have begun to consider how the West managed to successfully develop both capable states in fiscal and legal terms, and states in which the ruler was kept in check, such as by a constitution and democratic vote. As Tim Besley and Torsten Persson have pointed out, ‘[e]conomists generally assume that the state has sufficient institutional capacity to support markets and levy taxes, assumptions which cannot be taken for granted in many states, neither historically nor in today's developing world.’25 The black box that is the state is finally being opened up, and we are at last moving beyond thinking about the state merely in terms of its size.
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