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Bounded Leviathan: or why North and Weingast are only right on the right half

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  • Maria Alejandra Irigoin
  • Regina Grafe

Abstract

The great merit of North’s and Weingast’s insight into the importance of a ruler’s credible commitment to protecting property rights is that it is both parsimonious and it lends itself beautifully to generalizations. It has e.g. inspired the economic literature on the importance of legal origins” (LaPorta et al., 1998, 2008), which seemed to vindicate the notion that post-Glorious Revolution English institutions were particularly conducive to economic growth. More recently economists have acknowledged that growth in fact depends on state capacity. This encompasses not only investor protection (legal capacity) but also the ability of the state to finance itself, fiscal capacity. (Besley and Persson, 2009, 2010) show that the protection of private property rights and that of public property rights to taxation are linked and most likely co-evolutionary. However, the precise relation between the two is anything but clear. This paper argues that North’s and Weingast’s models one-sided focus on state coercion that threatened subject’ property rights has obscured the relation between coercion used in revenue collection and total revenue role of fiscal capacity. We suggest a very simple model to show that this relationship between state fiscal capacity and legal capacity is not linear, especially in the phase of nation state building. Before 1800 states faced one of two very different central challenges. 1) States that already exhibited high levels of coercion had to try to keep in check the ruler’s potential for predation as North and Weingast argued. 2) States that used very low levels of coercion faced a coordination problem instead of a predation issue. The case of Spain provides empirical evidence for the existence of states where an increase in coercion would have improved fiscal capacity, but high levels of legal capacity paradoxically prevented the ruler from adopting this path. Finally, we use financial market developments to show the serious welfare implications that resulted from such a lack of coordination and integration.

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Bibliographic Info

Paper provided by London School of Economics and Political Science, Department of Economic History in its series Economic History Working Papers with number 44492.

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Length: 38 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:ehl:wpaper:44492

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  1. Timothy Besley & Torsten Persson, 2009. "The Origins of State Capacity: Property Rights, Taxation, and Politics," American Economic Review, American Economic Association, vol. 99(4), pages 1218-44, September.
  2. Mauricio Drelichman & Joachim Voth, 2011. "Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600," Economics Working Papers 1262, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Peter Temin & Hans-Joachim Voth, 2004. "Credit Rationing and Crowding out during the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862," Working Papers 211, Barcelona Graduate School of Economics.
  4. Regina Grafe & Alejandra Irigoin, 2012. "A stakeholder empire: the political economy of Spanish imperial rule in America," Economic History Review, Economic History Society, vol. 65(2), pages 609-651, 05.
  5. Lane, Frederic C., 1958. "Economic Consequences of Organized Violence," The Journal of Economic History, Cambridge University Press, vol. 18(04), pages 401-417, December.
  6. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  7. Earl J. Hamilton, 1943. "Monetary Disorder and Economic Decadence in Spain, 1651-1700," Journal of Political Economy, University of Chicago Press, vol. 51, pages 477.
  8. Sussman, Nathan & Yafeh, Yishay, 2006. "Institutional Reforms, Financial Development and Sovereign Debt: Britain 1690 1790," The Journal of Economic History, Cambridge University Press, vol. 66(04), pages 906-935, December.
  9. Drelichman, Mauricio & Voth, Hans-Joachim, 2011. "Funding Empire: Risk, Diversification, and the Underwriting of Early Modern Sovereign Loans," Economics working papers mauricio_drelichman-2011-, Vancouver School of Economics, revised 06 Jul 2011.
  10. Mauricio Drelichman & Hans-Joachim Voth, 2014. "Risk sharing with the monarch: contingent debt and excusable defaults in the age of Philip II, 1556–1598," ECON - Working Papers 145, Department of Economics - University of Zurich.
  11. Ashworth, William J., 2003. "Customs and Excise: Trade, Production, and Consumption in England 1640-1845," OUP Catalogue, Oxford University Press, number 9780199259212, October.
  12. Grafe, Regina & Irigoin, Maria Alejandra, 2006. "The Spanish Empire and its legacy: fiscal redistribution and political conflict in colonial and post-colonial Spanish America," Journal of Global History, Cambridge University Press, vol. 1(02), pages 241-267, July.
  13. M.A. Irigoin & R. Grafe, 2006. "Bargaining for Absolutism: A Spanish Path to Nation State and Empire Building," Oxford University Economic and Social History Series _065, Economics Group, Nuffield College, University of Oxford.
  14. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
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