Alessandro Gabriele Ferraioli

“Monarchy is the best kind of government because the King
is the owner of the country. Like the owner of a house, when
the wiring is wrong, he fixes it”

Could we deny that the owner of a country would have an
incentive to make his property productive? What’s the
difference with Democracy?
We need:
A new theory of Democracy and Dictatorship
How these types of government affect economic
developement
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1.
2.
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“No society can work satisfactorily if it does not have a
peaceful order and usually other public goods as
well”
ANARCHY
• Violence
• Theft

Victims lose
goods and
the incentive
to produce
other goods
NO
PRODUCTION
Colossal
gains from
providing
Peace
Can we conclude that because everyone could gain
from it, a peaceful agreement emerge by voluntary
agreement?
Problem: each individual bears the full costs of risks of anything
done to help establish a peaceful order but receives only a share
of the benefits.
Small
populations
Large
populations
Voluntary
agreement: each
person obtain a
great share
Not voluntary
agreement:
costs>individual
gain
Primitive
societies:
collective action
Why Large
Populations
avoided anarchy?
◦ Chinese warlords: roving bandits, without legitimation, settle down
and take theft in the form of regulary taxation and at the same
time maintain a monopoly on theft in the domain.
◦ The bandit will take only a part of income in taxes and will provide
public goods to generate an incentive to produce, save (capital
after-taxes) and invest.
◦ The monopolization of theft and the protection of the tax
generating-subjects eliminates anarchy
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 a government.
◦ Thus government for large groups arises, not because of social
contracts or voluntary transactions of any kind but because of
rational self interest among those who can organize the greatest
capacity for violence
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Any individual who has autocratic control over a country will provide
public goods because he has an “encompassing interest”
Size of the stake in society: the larger is, the greater public goods
provided
 If an autocrat received 1/3 of any increase in the income of his domain
in increased tax collections, he would then get 1/3 of the benefits of the
public goods he provided
 He would have an incentive to provide public goods up to the point
where the national income rose by the reciprocal of 1/3 from his last
unit of public good expenditure
The encompassing interest of the autocrat permitted a considerable
development of civilization
From not long after settled agricolture until French revolution the
humanity was subject to autocracy and tax theft, but under this
stationary banditry there was an impressive development of
civilization.
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So the autocrat has incentive to make his domain productive,
because of the encompassing interest.
But the autocrat is the owner of all wealth in a country: he has the
incentive to mantain and increase the productivity, but he also
charges MONOPOLY rent on EVERYTHING
He has an incentive to extract the maximum possible surplus from
the society and to use it for his purposes (the consumption of an
autocrat is not limited)
This PREDATION obscures the superiority of stationary bandit over
anarchy and the advances of civilization that have resulted from it
He will devote some of the resources he obtains through taxation to
public goods but he will impose far higher tax rates than are needed
to pay for the public goods since he use tax collections to maximize
his net surplus
 Incentive to provide public goods + Incentive to extract max
surplus
The autocrat gets all of his receipts in the form of explicit taxation
 The higher the level of provision of public goods, given the tax rate, the
higher the society’s income and the yield from this tax rate
T= , High P.G. I ↑ Y ↑
 The higher the tax rate, given the level of public-good provision, the lower
the income of society
P.G.= , High T I ↓ Y↓
Assume level of P.G. is given
 If we start with low taxation: as tax rates increase tax receipts
increase; after the revenue-maximizing rate is reached, higher tax
rates distort incentives and reduce income, so tax collections fall. The
rational autocrat chooses the revenue-maximizing tax rate(Schumpeter
1991, Ibn Kalduhn 1967)
The optimal tax rate determines the share of any increase in income the
autocrat receive (determines the level of the ecompassing interest)
The autocrat spends money in P.G. up to the point where his last $ generates
a $ increase in his share of the income.

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2 candidates for a presidency/ 2 parties seeking to form gov.
Assumptions:
◦ Democracy has no better motivation
◦ Political leaders are self-interested, they use any expedient to
obtain majority support
Candidates are able to BUY majority transferring income from
population to prospective majority
Taxes imposed for this transfer reduce society’s output
Would that generate distortion of incentives as autocracy? NO
◦ Democratic Majority and Autocrat control tax collections
(encompassing interest in society)
◦ D.M. also earns a % of the market income of the society: his
interest in society’s productivity is more encompassing
◦ So D.M. will redistributes to herself less than A.

Suppose we are at the revenue maximazing rate
Autocrat
Increase of tax rate:
↓of national
income= ↑ total
income taxated
Reduction of tax
rate: ↑ of national
income, ↓ total
income taxated
D.M.
REDUCES tax rate to
increase its income:
↑ national income, ↑
taxes collection, ↑
market income
Optimal tax rate for
D.M. is LOWER
DEMOCRACY’S INTEREST
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The more encompassing the interest, the less the social
losses from redestributions to itself (D.M. has a bigger
interest because: tax income+market income)
The narrower the interest, the less it will take account of
social costs of redestributions
Thus, also in democracy, sometimes, the predictions are too
optimistic: small parties/ lobbies have little incentives to
consider social losses
Democracy will not necessarily destribute to itself less than
Autocracy. However redistributions will be shared by citizens
Democratic political competition, even when it works badly,
doesn’t give to the parties’ leaders incentives to extract max.
surplus from society as in the autocracy.
Autocrat must
secure:
Maximum income in
economy if high
rate of investments
and long-term
investments
•protection from
theft and
expropriation
•Impartial
enforcement of
contracts
Short-viewed Autocrat:
•Expropriates assets
•No enforcement
•Repudiates debts
•Prints money to spend
•Stable currency
Long King’s life and
succession of dynasty
socially desirable to avoid
short time problems
The Autocrat must
promise, but his promise
it’s not enforceable by
another independent
source of power
Conditions for economic development
In an economy individuals need protection of properties
and contracts
So individuals need a secure government that protect
individual rights
Individual rights are artifact of a special set of
governmental institutions: there’s no property without
government
Rights protected from private violation but also from the
government itself
Conditions needed for economic development are the
same needed for a Lasting Democracy
DEMOCRACY
Short
horizons
Property &
for
contracts
political
last
leaders
but
across
generatio succession
of power
ns
under the
rule of law
Long term
contracts,
trusts and
foundatio
ns
Capital
flees from
countries
with
dictatorsh
ips to
stable
democraci
es
Highest
level of
economic
developm
ent and
economic
developm
ent
(Winnings
in wars)
External
transitions
Subjects don’t overthrow the
autocrat: same problem of lack of
social contracts in large societies
(Pharaohs, Saddam…). Replaced
by another stationary bandit.
Democracies are rich and
have prevailed against
autocracy models (fascism
and communism)
Internal
transitions
Absence of conditions
for autocracy:
dispersion of forces, no
one can overpower the
others
Whigh
interpretation of
history
Dahl (1971),
Vanhnen (1989)
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Balance of power that keeps any leader from
assuming total control in an area
Each leader can’t be the autocrat of a small domain: in
large areas there could be small-scale autocracies
Best option is power sharing: engage in fighting or
work out a truce (peace and public goods
advantageous for all)
Peaceful conditions making mutually advantageous
contracts
Estabilish independent judiciary (contracts and
properties protected)
Elections
INITIAL EMERGENCE OF DEMOCRACY WITH
GLORIOUS REVOLUTION IN ENGLAND (1689) and
13 COLONIES IN U.S.
Autocracy
Encompassing
interest of the
autocrat: order,
public goods
and social
progress
Individual rights
are not secure
in the long-run
Democracies
Emphasis on
individual rights for
democracy is the
same for property
and contracts
Advantages from
encompassing
parties
Difficulties
generated by
interests on
economic
policymaking
Preventing
extraction of social
surplus by leaders