“Corruption and overregulation are killing my business.”
“Good entrepreneurs know how to avoid paying taxes.”
Two statements often heard in conversation with entrepreneurs in postcommunist countries.
1. Introduction
Modern political economy has revisited and revised the theory of the state developed by the
contract theorists of the seventeenth and eighteenth centuries.
As in that earlier era, the
state or sovereign is seen as providing security or some other public good that individuals
cannot provide for themselves, and for which individuals are willing to enter into a social
contract and surrender some portion of their property or liberties. North (1981, p. 23), for
example, suggests in the modern theory’s paradigmatic formulation that “the state trades a
group of services, which we shall call protection and justice, for revenue.”
However, today’s theorists - influenced by the vast literature on “transaction costs” in-
spired by Coase (1960) - are decidedly more skeptical than their forerunners of the scope for
efficient bargaining between the state on the one hand, and individuals on the other.
1
The
inherent problem with a contract to which the state is a party, of course, is that there is
typically no third party to enforce the contract. “A state with sufficient coercive power to
[enforce contract and property rights and provide public goods] also has the power to with-
hold protection or confiscate private wealth” (Greif et al 1994). This potential for ex-post
1
For a review of the “New Institutional Economics of the State,” see Furubotn and Richter (2000, ch. 9).
3
Convention