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I don't think state capacity and competition between states are mutually exclusive. During the middle ages there existed growth inhibiting organizations and institutions other than the state, guilds for example. State capacity essentially ensured sufficient power to stop local barriers to trade.

Another aspect in which state capacity could lead to economic growth requires thinking about optimal tax theory. Certain types of taxation inhibit growth more than others. Increasing state capacity allowed the state to collect taxes using distortionary mechanisms.

@Mark Lutter

The way to articulate and therefore understand these abstract processes is to refer to their causes not effects: free-riding and rent seeking.

The statement "State capacity essentially ensured sufficient power to stop local barriers to trade" is correct, but would be causally articulated as the state forced the centralization of rent seeking.

This is the same purpose that the federal governments provides: negotiation of terms for access to markets. In other words, they force market prices to be free of rent seeking. The question is whether the multiplier from central rent seeking or the multiplier from distributed rent seeking is superior. I think that's very hard to prove. In fact, all we can prove is that the state centralizes rent seeking. I don't think we can prove that there is much benefit to the centralization of rent seeking. It appears only that stability in rent seeking is superior to volatility in rent seeking, because stability in rent seeking forces all individuals to compete in the market now that the capacity to seek rents is put at a distance. Conversely, the concentration of rents creates a rental economy that generates rent-based wealth. (Washington DC). But there isn't any evidence that rent based wealth has an particular value to a society other than generating wealthy consumers. The entire problem remains the same: how to force out rent seeking and free riding such that all individuals are participating in the market for goods and services.

This is the necessary foundation for any economy, and the necessary foundation of property rights: property rights are a prohibition on rents and free riding, forced from the family to the individual, as rents and free riding are forced upward into the state at the expense of the family.

If you grasp that this is what is being done, then you will grasp the causal nature, not the descriptive nature, of the process of developing states.

@PeterB

"Can someone tell me when the idea of fractured and decentralized states competing with one another resulting in the "European miracle" was replaced by centralized and formal state capacity theories of economic growth and development?"

(a) Napoleon and total war necessitated german consolidation.
(b) World communism and marxism
(c) Keynes, Unemployment and Credit Capacity
(d) Democratic socialism and intergenerational redistribution
(e) Post Communist state Corporatism (China) and modernization.


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