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Recently, Horowitz attended an academic conference where Roger Myerson, winner of the 2007 Nobel Prize in Economics, discussed the importance of local governments.
Myerson pointed out that local governments emerged in human society long before modern states were founded. They were crucial to social development. Humans evolved in communities that established and maintained ownership systems, defined how members could exploit resources and in ones where neighbors respected owners’ rights to benefit from improving resources. From this “communal consensus,” local leadership structures emerged to adjudicate disputes.
However, outside raiders always threatened community members’ property rights. About 5,000 years ago, regional states emerged that protected local communities from outside raids. Trade and commerce expanded, and the newly founded states took a portion of the surplus generated from the peace. These newly founded states appointed agents to project force and implement state policies throughout the regions.
Local and national leaders must cooperate to secure property rights through some combination of top-down control by national leaders in local politics (autocracies) and bottom-up influence of local leaders in national politics (democracies). However, there is a moral hazard in building strong governments. Both national and local leaders have an incentive to take an excessive portion of the economic gains.
Myerson noted that we pay leaders not to abuse power by giving more benefits later in their careers. State power depends on the rulers’ reputations for reliable patronage, so even autocratic rulers typically set up councils of high officials to monitor actions.
Myerson noted that to exercise state power over a province, rulers appoint governors with delegated powers. Residents in the province fear disobeying the governor’s commands. However, there must be a balance between local and national leadership. Myerson calls the outside governors the Mandarins. They are often moved around the larger state (think of Pontius Pilate). The local leaders of the provinces, called the gentry, do not move around (think of Caiaphas).
Because the gentry remain, they have longer time horizons than the mandarins. They are crucial to maintaining order and directing local public investments. When the mandarins’ actions threaten local property rights, the gentry must be able to appeal to the ruler’s central council.
He noted that international aid often strengthens central governments and reduces the need for local support. Perhaps a reason the U.S. state-building in Afghanistan failed was because our policy centralized authority under an elected national leader but ignored the crucial role of local leadership.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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