Optimal Jurisdictions and the Economic Theory of the State: Or, Anarchy and One-World Government Are Only Corner Solutions

As I see it, a genuinely economic theory of the nation state must satisfy at least two criteria: (1) it has to explain why a community of self-seeking individuals is better off with certain forms of decision-making centralized rather than dispersed, and (2) it has to explain what factors determine the optimal jurisdictional area over which this centralized decision-making will take place. At the risk of oversimplification we may say that an economic theory of the state must explain why both anarchism and one-world government are generally non-optimal political arrangements. Recently, James Buchanan (1975: 1-73) and Robert Nozick (1974: 3-119) offered economic accounts of the origin of the nation state. In their view, the nation state emerged to reconcile quarrels among self-seeking individuals that invariably occur in the 'state of nature'. Inasmuch as quarrels add to the transaction costs of economic activity, a rational basis exists for the creation and maintenance of a quarrel-quelling agency of one sort or another. Buchanan named his quarrel-quelling agency the 'protective state', and Nozick named his the 'minimal state'. However, the fact that Buchanan saw his 'protective state' as being grafted onto a discordant 'state of nature' by way of a social contract and that Nozick saw his 'minimal state' as gradually evolving out of the competitive market process (the unintended result of self-seeking behavior), suggests that the modern Hobbesian and the modern Lockean have little in common. Yet, as I shall demonstrate, they have much in common. In fact, Buchanan's theory of the 'protective state' and Nozick's theory of the 'minimal state' are essentially complementary and together provide a novel framework for developing an economic theory of the state that meets the two aforementioned criteria. In summarizing their arguments, I shall apply the model of McGuire's (1974) analysis of the technology of public-goods provision. In this way the Buchanan-Nozick theory may be used to derive an empirical theory of early state formation. I must emphasize that it is the public-goods model that provides the framework for combining or reconciling the two theories. I In Buchanan's characterization of the state of nature--appropriately termed Hobbesian anarchy--there is no general agreement about property rights or how property (once assigned) may be legitimately transferred in the present and in the future and from the present into the future. Individuals engage in defense and predation activities and the private provision of their other wants. The entire community is at war with one another until finally a stand-off equilibrium is reached. In equilibrium each individual's time is divided between productive and warlike activities so as to equate benefits at the margin. (1) The interest of the many is clearly served by the negotiation of a nonaggression pact whereby each individual agrees to reduce his defense/ predation expenditure on the condition that the others do the same. This pact requires some agreement about what Buchanan called the 'original' distribution of property rights. Each individual agrees to give up some of his claims on others and their possessions if they do likewise, and eventually this 'social contract' creates the framework within which other exchange institutions may evolve and promote a widespread division of labor. Obviously, no one will unilaterally disarm (or reduce his arms expenditure) in this Hobbesian war of 'all against all' unless he believes that the others are simultaneously doing the same. (2) This is the raison d'etre of what Buchanan called the protective state. It is introduced to protect property rights under the original agreement by keeping men to their promises and imposing the 'status quo' on new generations as they appear. In cases of dispute or transgression the 'protective state' decides who is liable and what type of settlement is appropriate. Most important to its functioning the protective state determines when force may be legitimately employed in social relations. …