Of Rule and Revenue

2. The Theory of Predatory Rule

C H A P T E R I I The Theory of Predatory Rule Rulers maximize revenue to the state, but not as they please. They maximize subject to the constraints of their relative bargaining power vis-a-vis agents and constituents, their transaction costs, and their discount rates. These constraints determine the choice of revenue system. That is my hypothesis. Rulers are predatory in that they always try to set terms of trade that maximize their personal objectives, which, I argue, require them to maximize state revenues. They do not always plunder, pillage, and exploit. However, each will, in North's words (1981, 23), "attempt to act like a discriminating monopolist, separating each group of constituents and devising property rights for each so as to maximize state revenue." Consequently , rulers devise structures to facilitate exchange and increase their marginal rate of return. Most rulers must offer some return for the revenue extracted. Even rulers who hold nearly all the resources of power —which does occasionally occur in history—are still likely to require agents to enforce the policies. Rulers are chief executives (see, esp., Barnard 1938), who are sometimes principals and sometimes agents but whose administrative efficacy always rests on their ability to manipulate their environment. The action in my model lies in the constraints on ruler behavior. Relative bargaining power and transaction costs account for the fact that rulers in history do not always rob their subjects blind and are not always running protection rackets. Rulers cannot simply advance any policy that appeals to them. They choose among the feasible set of options, and they can act to 10 The Theory of Predatory Rule 11 change that feasible set. By definition rulers are actors within a domestic and an international context, and they must interact with constituents, agents, and the representatives of other polities. To achievetheir ends, they must coerce and bargain, develop their resources, and, often, alter their constraints. Policies are the outcome of an exchange between the ruler and the various groups who compose the polity.1 Policies are a function of rulers' terms of trade. Rulers negotiate contracts with their agents and constituents , and each set of actors attempts to attain the best possible terms. Contracts are possible only if they make each party better off. Rulers are providing goods, usually collective goods, that have the attributes of gains from trade. Such gains are possible only if rulers can provide economies of scale in protection, justice, and other sought-after goods or if they can reduce uncertainty and ensure against risk. Of course, over time a contract is likely to prove unfavorableto one or the other of the contracting parties, who will then try to change it. Changes in state policies and organization require renegotiation of contracts. Although I start with contractual relationships, I do not assume a precontract Hobbesian state of nature, with its equal distribution of power. I follow the contracting paradigm in arguing that the state economizes on resources that individuals otherwise would have to pay for, such as selfdefense . There are gains from initialcontracting. However, I part company with many neoclassical economists who argue that all economic actors are subject to and benefit from contracting. In my view a group could be so powerless as to be effectively excluded from a meaningful contractual relationship altogether. Nor do all parties benefit equally from the contract . Moreover, when the state itself is the enemy from whom people are buying protection, the state resembles a protection racket rather than an institution that engages in productive activity (Lane 1958; Frohlich and Oppenheimer 1974; Davis 1980; Emerson 1983; Tilly 1985). It is not unusual historicallyto have both kinds of states exist side by side. The first determinant of the terms of exchange is the relativebargaining 1 Jensen and Meckling (1976) and Fama (1980) characterized the firm and property rights as a "nexus of contracts." In earlier formulations of my argument, I posited that the state is also a "nexus of contracts" between rulers and agents, rulers and constituents, and, often, constituents and agents. One problem with this formulation, as Douglass North pointed out, is that the ruler or institutionsof the state are contractors who can be sued as a whole. Another major problem with the formulation, I have come to realize, is that it provides too trivial a role for the institutions that structure the contracting and exchange process. Such institutions are the heart of the state-building and revenue-producing process Moreover, they do not...