Mancur Olson, “The criminal metaphor”, in Mancur Olson, Power and Prosperity (2000), pp. 3-24.

Summary: State formation can be explained with reference to a criminal metaphor.  Those with the power to organize violence/power tend to use it, but there is more than one way to maximize self-interest.  For the petty thief with no stake in the system, taking as much as possible, as often as possible is rational.  For the mafia family, offering protection and extracting a tax is rational.  Olson proposes another archetype, the stationary bandit, who has an encompassing stake in the system that he presides over (more so than the mafia family.) The stationary bandit has an incentive to tax less (at a rate that maximizes payoff when productivity is taken into account) and he also has an incentive to provide public goods (such as lowering transaction costs) that maximize productivity.  This model also applies to democracies, but the self-interest of the actors is tied to creating majorities.  Interestingly, there are cases where supermajorities actually treat the minorities as they treat themselves, because of their encompassing interest in the society – essentially these societies are operating at Pareto efficiency.
Critique: This model assumes that, in a democracy, all actors are, in effect, stationary bandits.  As in any cartel system, the incentive is to cheat and to extract more for yourself at the expense of the whole in the short term, and Olson’s analysis does not explain why an actor would pursue a self-interested position on one level (that of the health of the system) but not on the other (self-maximization within a cartel system).
== Notes ==
– When we examine action, we must pay attention to self-interest, but also to the benevolence/malevolence of actors
– Self-interest leads to collective problems (which can act against self-interest) but this does not necessarily curtail an actor’s behaviour
– “it makes a huge difference whether individuals with coercive capacities have a miniscule or narrow stake in the society, on the one hand, or an encompassing interest, on the other” (4)
– Olson uses the analogy of the petty thief vs. the mafia family
– It’s a question of how much stake each actor has in the overall system
– The Stationary Bandit (i.e. a warlord who takes over a domain) has more of a stake than the mafia does – he has an interest in maintaining order over anarchy.
– The stationary bandit keeps on gaining from reducing his rate of tax theft down to the point where what he gains (from theft on a larger output) is just offset by what he loses (from taking a smaller share of the output) (8)
– The stationary bandit also has and incentive to provide public goods.
– The bandit leader has an encompassing interest in his domain.
– “Governments for large groups of people have normally arisen because of the rational self-interest of those who can organize the greatest capacity for violence.” (11)
– Roving banditry brings anarchy, the stationary bandit increases output
– The shift from roving to stationary banditry brings benefits, but does not arise by social contract or other voluntary transactions – the stationary bandit model owes nothing to good intentions
– Idea of another invisible hand – a mechanism which guides encompassing interests to use some of their power in accord with public interest, regardless of their actual intention.
– “a secure autocrat’s encompassing interest in society makes him limit the extent of his tax theft.” (14)
– How do democracies fit into this model?
— Assumption that democratic political leaders are just as self-interested as autocrats and seek to win by opportunistically obtaining majority support.
— A candidate needs a majority, and may be able to buy one by transferring income from society at large to a prospective majority.
— Optimal tax rate is lower than the autocrats because he is concerned with the majority’s share of market earnings.
“It pays a ruling interest, whether an autocrat, a majority or whatever, to stop redistributing income to itself when the national income falls by the reciprocal of the share of the national income it receives.” (17)
– Sometimes majorities and super majorities have sufficiently encompassing interest in society, that they treat the minority as they treat themselves. In this case, the second invisible hand works with Pareto efficiency.
– This comes out of the effect of the two theories of narrow/encompassing interest. The upshot is that there are superencompassing interests that do not comprise all of society that would lose from redistributing income from the minority to themselves. (22) Though they are self-interested, they will treat minorities equally.
–  However, there is an assumption that interests are considering the long run. This is not necessarily true.