Introduction

The state can affect the net wealth of a community by redefining the structure of property rights, and by providing public goods, such as standardized weights and measures, which reduce the costs of transacting. Neoinstitutional Economics suggests that the rules of the game, which in part are controlled by the state, have a fundamental role in determining whether an economy enters a path of growth and development or stagnation and decline. But why should any government lay down rules that retard the economy? Although little can be said a priori about the utility function of those who control the state, it is unreasonable to assume that, other things being equal, they either prefer or are indifferent to economic decline in their country. This conclusion should be independent of our model of the state, be it one assuming a contract state or a predatory state. For example, a ruler of a predatory state who seeks to maximize her wealth by taxing her subjects, will, other things being equal, attempt to maximize the tax base, the national income. An increase in the national income due to more clearly defined property rights and less dissipation of rent should be welcomed by both subjects and ruler, as it can be used to augment both tax revenues and general living standards.