The Myth of the Lacking “State Capacity”

The concept of “state capacity” has become popular in the economic literature, notably to explain why today’s democratic governments seem incapable of doing anything correctly, from supplying public services to controlling their budgets. The headline of a recent article in The Economist illustrates the phenomenon: “Governments Are Bigger than Ever. They Are Also More Useless: Why Voters Across the Rich World are Miserable” (September 23, 2024). According to the magazine, a major cause lies in the growth of entitlements (guaranteed transfers) as opposed to public services such as schools or infrastructure. The phenomenon is visible in America and elsewhere in the rich world.

Another factor is crippling regulation. One example (“The Harris Broadband Rollout Has Been a Fiasco,” Wall Street Journal, October 4, 2024):

The 2021 infrastructure law included $42.5 billion for states to expand broadband to “unserved,” mostly rural, communities. Three years later, ground hasn’t been broken on a single project. The Administration recently said construction won’t start until next year at the earliest, meaning many projects won’t be up and running until the end of the decade. …

States must submit plans to the Commerce Department about how they’ll use the funds and their bidding process for providers. Commerce has piled on mandates that are nowhere in the law and has rejected state plans that don’t advance progressive goals. …

The Administration has also stipulated hiring preferences for “underrepresented” groups, including “aging individuals,” prisoners, racial, religious and ethnic minorities, “Indigenous and Native American persons,” “LGBTQI+ persons,” and “persons otherwise adversely affected by persistent poverty or inequality.”

It is not a matter of which political party is in power. What the government cannot do correctly often refers to what the specific defender of state capacity thinks the state should do more of. “State capacity” is an euphemism for state power.

It looks rather surprising that the democratic state would lack state capacity as its scope and means of action have grown for more than a hundred years. One indicator is that, across the OECD, government spending has grown from around 10% of GDP at the turn of the 20th century to more (and sometimes much more) than 40% today. The Code of Federal Regulations contains 1,089,462 restrictions (at the end of 2022), measured by the frequency of the keywords “shall,” “must,” “may not,” “required,” and “prohibited,” more than double the number at the end of 1970.

It is a Wonderland illusion to believe, like Daron Acemoglu and James Robinson in The Narrow Corridor, that state power can grow indefinitely as long as “social power” grows concurrently (see my review of The Narrow Corridor in Regulation). We get a glimpse of the result in the subsequent book of Acemoglu (with Simon Johnson), Power and Progress, where an ideal and benevolent Leviathan follows their advice and fights for all progressive causes, against greedy corporations and with the support of powerful and altruistic trade unions (I barely exaggerate: see my Regulation review of Power and Progress).

Anthony de Jasay’s model of the democratic state (see notably his book The State) is more useful in explaining where state capacity leads. For decades, an adulated state has been responding to the grievances of politically powerful groups by discriminating in their favor (with subsidies, tax breaks, and favorable regulations) at the cost of other citizens. The leaders and activists of the newly disfavored groups vent their own grievances and stake their demands. Political competition leads politicians to try to satisfy the new grievances. Policies pile up and become more and more inconsistent and conflictual. The higher state capacity acquired in the process further motivates special interests and their activists to demand more privileges, and the process continues.

Analysts who observe the growing discontent typically can’t put their fingers on its real underlying cause. Janan Ganesh merely comes close in a September 23 Financial Times column titled “The End of the Popular Politician.”

The cause is state capacity—read “state power”—in a democratic regime, which degenerates into a political war of all claimants against all, with growing and churning redistribution. Because of the churning, it is often not clear whether one is, on the net, a beneficiary or an exploiter of the system. The state is less and less able to satisfy all the contradictory demands addressed to it. The monstrous state seems impotent. Everybody grows more dissatisfied. The populists rise with their own promises to appease their supporters’ grievances to the detriment of somebody else.

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You will see many strange things in this image created by DALL-E to illustrate my post, but many strange things are also happening in the political world. We can understand that this poor robot is lost.

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