Excerpt From: Olson (2010). Power and Prosperity
Content Summary: 1200 words, 6 min read
Part Of: Politics sequence

Theft in Moderation

Let us contrast the individual criminal in a populous community with the head of a Mafia family that can monopolize crime in a neighborhood. Suppose that in some well-defined turf, a criminal gang cannot only steal more or less as it pleases but can prevent anyone else from committing crimes there. Will it gain from taking all it can on its own ground? Definitely not.

If business in this domain is made unprofitable by theft, or migration away from the neighborhood is prompted by crime, then the neighborhood will not generate as much income and there will not be as much to steal. Indeed, the Mafia family with a true and continuing monopoly on crime in a neighborhood will not commit any robberies at all. If it monopolizes crime in the neighborhood, it will gain from promoting business profitability and safe residential life there.

Thus, the secure Mafia family will maximize its take by selling protection- both against the crime it would commit itself (if not paid) as well as that which would be committed by others (if it did not keep out other criminals). Other things being equal, the better the community is as an environment for business and for living, the more the protection racket will bring in. Accordingly, if one Mafia family has the power to monopolize crime, there is little or no crime (apart from the protection racket). The considerable literature on monopolized crime makes it clear that secure monopolization of crime does, in fact, usually lead to protection rackets rather than ordinary crime. Outbreaks of theft and violence in Mafia-type environments are normally a sign that the controlling gang is losing its monopoly. 

The individual robber in a populous society obtains such a narrow stake of any loss to society that he ignores the damage his thievery does to society. By contrast, the Mafia family that monopolizes crime in a community has, because of this monopoly, a moderately encompassing stake in the income of that community, so it takes the interest of the community into account in using its coercive power. Whereas the individual criminal in a populous society bears only a minuscule share of the social loss from his crime, the gang with a secure monopoly on crime in a neighborhood obtains a significant fraction of the total income of the community from its protection tax theft. Therefore, though the individual criminal normally takes all of the money in the wallet he steals, the secure and rational Mafia leader never sets a protection tax rate anywhere near 100 percent: this would reduce the neighborhood’s income so much that the Mafia family itself would be a net loser.

Preference for Stationary Bandits

The warlord who I was reading about, Feng Yu-hsiang, was noted for the exceptional extent to which he used his army for suppressing thievery and for his defeat of the relatively substantial army of a notorious roving bandit called White Wolf. Apparently, most people in Feng’s domain wanted him to stay as warlord and greatly preferred him to the roving bandits. At first, this situation was puzzling: Why should warlords who were simply stationary bandits continuously stealing from a given group of victims be preferred, by those victims, to roving bandits who soon departed? The warlords had no claim to legitimacy and their thefts were distinguished from those of roving bandits only because they took the form of relentless tax theft rather than occasional plunder.

There is a good reason for this preference. As we have seen, there is little production in an anarchy and thus not much to steal. If the leader of a roving bandit gang who finds only slim pickings is strong enough to take hold of a given territory and to keep other bandits out, he can monopolize crime in that area- he becomes a stationary bandit. The advantage of this monopoly over crime is not mainly that he can take what others might have stolen: it is rather that it gives him an encompassing interest in the territory. He actually has a stronger encompassing interest than the Mafia family, since the bandit leader who takes over an anarchic area does not have competition from any government’s tax collectors: he is the only one who is able to tax or steal in the domain in question.

A Benefactor to Those He Robs

The second way in which the encompassing interest of the stationary bandit changes his incentives is that it gives him an incentive to provide public goods that benefit his domain and those from whom his tax theft is taken. Paradoxically, he provides these public goods with money that he fully controls and could spend entirely on himself. We know that a public good benefits everyone in some area or group and that many public goods, such as levees that protect against floods, police that deter crime, and quarantines that limit contagious diseases, make a society more productive.  He has an incentive to spend his resources on all productivity-enhancing public goods up to the point where his last dollar spent on these goods equals his share of the resulting increase in output. Thus, if the stationary bandit’s optimal rate of tax theft is 50 percent, he will spend on public goods up to the point where the last dollar spent on these goods adds $2 to the output of the domain, since he will then receive $1.  Readers who want formal proofs and a mathematical and geometric exposition of this argument should consult McGuire & Olson (1996).

The bandit leader, if he is strong enough to hold a territory securely and monopolize theft there, has an encompassing stake in his domain. This encompassing interest leads him to 

1. Limit and regularize the rate of his theft and to spend some of the resources that he controls on public goods that benefit his victims no less than himself. 
2. Since the settled bandit’s victims are for him a source of tax payments, he prohibits the murder or maiming of his subjects. 
3. Because stealing by his subjects, and the theft-averting behavior that it generates, reduces total in-come, the bandit does not allow theft by anyone but himself. 

He serves his interests by spending some of the resources that he controls to deter crime among his subjects and to provide other public goods. A bandit leader with sufficient strength to control and hold a territory has an incentive to settle down, to wear a crown, and to become a public good- providing autocrat.

Autocracy has been commonplace at least since King Sargon’s conquests created the empire of Akkad in ancient Mesopotamia. Most of humanity over most of history has been subjected to autocracy and exploited by tax theft. It is very difficult to find examples of benevolent despots. The stationary bandit model fits the facts far better than the hypothesis that autocrats are altruistic.

References

• McGuire & Olson (1996). The Economics of Autocracy and Majority Rule