The Market for Protection and the Origin of the State

Many societies face enormous difficulties in establishing even the most basic level of protection against predatory gangs and bandits. Two leading economists, in a CEPR Discussion Paper, find that many developing and transition economies, as well as some in modern urban centres, can do little to avert ruthless exploitation.

Kai Konrad of the Free University of Berlin and Stergios Skaperdas of the University of California look at a variety of outcomes, ranging from self-help to buying protection, in assessing the market for protection. They start from a society where ‘peasants’ (who could be inner-city shopkeepers) try to protect themselves from ‘bandits’.  This will in fact be a form of anarchy and left to itself will result in individuals making choices as to whether to seek employment as a peasant or a bandit.  Incomes will be level over the whole of society but total output will be only a fraction of the maximum, because a share in the population won’t be ‘working’ and those who do work will spend time protecting their property.

But even this outcome looks good compared to some other possibilities.  ‘Collective protection’, through the formation of a peasants’ militia, seems an obvious alternative and the average level of protection gained can be higher. But there is a problem of free riders and the outcome is below that offered by a stable state.  In any case, such systems are workable only for small societies.

It is in the area of ‘protection-for-profit’ that some of the worst, but most stable outcomes, are to be found.  One possibility is the arrival of a single entrepreneur, a so-called ‘Leviathan’ who extracts his income from the peasants and uses that to pay off not only the guards to ‘protect’ the peasants but also to maintain his own bodyguard. The guards will also work to keep individual peasants within the community.  But Leviathan faces problems of entry – others will try to enter the market, or muscle in on his patch.  If this happens we find a system of competing ‘lords’.

Such an outcome can become stable but each lord ‘has a major headache that Leviathan did not have. Other lords are now after the tribute received from the peasants, and he needs to defend that tribute against them.  He can do that by hiring warriors to keep other lords outside his territory (and keep the peasants in) and possibly gain additional territory at their expense.’