Are States Like Firms?

Artist’s depiction of Ronald Coase

We have been looking at analogies for government this week (first the stationary bandit, then an internet platform). Today, I want to offer one more: the state as a firm. In this idealized view, conflict in political life is akin to transaction costs in economic life. Firms work to minimize internal transaction costs (and thus maximize revenue), whereas governments work to minimize internal conflict.

This idea is closely related to Ronald Coase’s “The Nature of the Firm” (wiki, pdf). Coase argues, as I understand it, that entrepreneurs who can do things more efficiently than the market in some small sphere (by avoiding transaction costs) create a competitive advantage for themselves. Activities that they can organize efficiently without using the price mechanism are included within their firm, while everything else is contracted out on the open market.

Applying this to government, a state could be defined as a group that can solve its internal conflicts more efficiently than external conflicts. By designing mechanisms that deal with conflict peacefully, government provides a service to its citizens (i.e. bullets versus ballots). Sometimes internal divisions or external difficulties arise that make it more difficult for the state to do its job, and war results. Other times, the government becomes corrupt or its interests diverge from those of its citizens. Once the state is unable to provide conflict resolution mechanisms, it has “failed,” in the same way that companies go bankrupt.*

This is a rough comparison, but it is a start. What say you?

___________________

*Kenneth Waltz, in his discussion of the frequency of civil wars on p. 103 of Theory of International Politics asks rhetorically, “Which is more precarious: the life of a state among states, or of a government in relation to its subjects?”

One thought on “Are States Like Firms?

  1. Pingback: Taxes, Moonshine, and State Building | You Study Politics, Right?

Comments are closed.