State capacity, economic freedom, and classical liberalism

This paper evaluates state capacity from the perspective of classical liberalism, especially the relationship of state capacity to economic freedom. It argues that a revenue-maximizing ruler is incentivized to allow for more economic freedom in the presence of more state capacity for most dimensions of economic freedom, as long as the time horizon for the ruler is non-myopic. In doing so, findings elsewhere concerning the relationship between other liberalizations (such as religious freedom and free trade) and state capacity are generalized. Expansions in state capacity are framed as facilitating efficiency-enhancing tax swaps which allow for more revenue generation and political support at the cost of the same or lower levels of deadweight loss. In the context of these issues, the classical liberal concern of a state using its capacity to repress society, rather than support markets, is also confronted.