Tuesday , February 18 2020
Home / S. Sumner: Money Illusion / Some preliminary thoughts on state capacity

Some preliminary thoughts on state capacity

Summary:
The following two pictures show two very different sides of the Chinese system: This shows a mass banquet in Wuhan. The government held a number of such celebrations in Wuhan during January 2020, and this helped spread the coronavirus. The second shows a new hospital in Wuhan, built in just a couple weeks: These pictures show us several aspects of the “state capacity” of the Chinese government. On the negative side, the Chinese system has little freedom, which often leaves the Chinese government uninformed of dangerous situations that need to be addressed. The Chernobyl incident in the old Soviet Union is another example of this problem. So perhaps “freedom” is one aspect of state capacity, as it allows states to be better informed. The second picture shows

Topics:
Scott Sumner considers the following as important:

This could be interesting, too:

Menzie Chinn writes Pre-Benchmarking Manufacturing Employment in MI, PA, and WI

Tyler Cowen writes How Japan avoided a bond market panic

Tyler Cowen writes Monday assorted links

Tyler Cowen writes Why is VC Twitter so peculiar?

The following two pictures show two very different sides of the Chinese system:

Some preliminary thoughts on state capacity

This shows a mass banquet in Wuhan. The government held a number of such celebrations in Wuhan during January 2020, and this helped spread the coronavirus. The second shows a new hospital in Wuhan, built in just a couple weeks:

Some preliminary thoughts on state capacity

These pictures show us several aspects of the “state capacity” of the Chinese government. On the negative side, the Chinese system has little freedom, which often leaves the Chinese government uninformed of dangerous situations that need to be addressed. The Chernobyl incident in the old Soviet Union is another example of this problem.

So perhaps “freedom” is one aspect of state capacity, as it allows states to be better informed.

The second picture shows that the Chinese government is good at getting stuff done quickly. For instance, they built a large high-speed rail system in a fairly short time.

The Brazilian government has not built much infrastructure in recent years. Is this due to a lack of “state capacity”, or have they (much like New York City) simply chosen to use that capacity to pay large pensions to middle class people, instead of building infrastructure.

I suspect that the difference between China and Singapore on the one hand and Brazil and New York on the other has to do with more than just preferences. I am fairly confident that China can build infrastructure at lower cost than Brazil, and Singapore can do so more cheaply than New York.

So perhaps low cost production by the state is one aspect of state capacity. But I’d be even more specific. It doesn’t do much good for a state to be able to produce haircuts at a lower cost than other states, as this activity is almost always (rightly) done in the private sector.

So what really matters is the ability to produce goods that are usually produced by governments at low cost. (I mean cost holding quality constant, as you’d obviously prefer high quality public goods.) I recall reading that Sicily has more forest rangers than all of Canada, so I’m going to go out on a limb and assume that Canada has more state capacity to produce forest ranger services at low cost.

The Brazilian example also hints at another issue, is the state doing the right thing? Perhaps state capacity depends at least in part on the state’s ability to ascertain and then undertake the things it should be doing.

In my 2008 study entitled “The Great Danes”, I discovered that once the intellectual climate moved in favor of free markets during the 1980s and 1990s, those countries with a high level of “civic virtue” (basically low corruption) moved toward free market regimes much faster that those countries with less civic virtue. Thus Denmark and New Zealand moved rapidly toward free market policy regimes, Greece and Italy much less so.

So one aspect of state capacity is the ability of countries to act in a way that is seen as desirable by a consensus of people who don’t have a special interest to inhibit change. A government that is able to “do the right thing” has more state capacity than one that does not, even if somewhere between 1% and 40% of the time the “right thing” turns out to be wrong. (If experts are usually wrong, then things are pretty hopeless. You might as well just flip a coin.)

In my paper on neoliberalism I described three models; moral, political and economic. Utilitarianism was the right moral system. Maximize aggregate utility. Neoliberalism was the right economic system, best able to implement utilitarian moral values. And hyper-democracy (meaning decentralized democracy with referenda) was the best political system, the best way to referee disputes about exactly how to construct the optimal policy regime.

Denmark, Singapore and Switzerland were the models of utilitarianism, neoliberalism and hyper-democracy. The best way to answer these questions:

1. What are the appropriate goals?

2. What economic system best achieves those goals?

3. What political systems best referees disputes over how to implement policy?

Thus any discussion of state capacity involves an ethical dimension, a technical dimension, and an epistemic dimension. Governments need the right moral values and the information needed make intelligent decisions about policy. The economy needs an incentive structure (i.e. technique) that will facilitate getting things done.

Even though Denmark, Singapore and Switzerland all have a great deal of economic freedom, they are also high in state capacity. Maybe it’s partly because they have a lot of economic freedom?

PS. In a January 1 post on state capacity libertarianism, Tyler Cowen specifically mentioned the success of Denmark, and indirectly alluded to the success of Singapore. Today he described the Swiss system as highly successful. I believe the three models in my 2008 paper are pretty close to what Tyler has in mind by “state capacity”. (Perhaps he’d add “scale”, which allows big countries to do extraordinary things like exploring space or confronting China. I wouldn’t.)


Tags:

 
 
 
Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

Leave a Reply

Your email address will not be published. Required fields are marked *