Lessons for pirates – from tax collectors

19th January, 2013

A government official and a bandit both redistribute resources, but an official does so far more efficiently

Here’s a question to puzzle the libertarians among you: what’s the difference between the government tax collector and a plundering bandit? One reasonable answer is that the tax collector, as the representative of a democratically elected government, has the same democratic legitimacy. A more utopian response is that the tax collector, unlike the bandit, serves the greater good. A third answer is that the tax collector is constrained by pre-agreed rules. (British parliamentarians seem not to accept this idea, preferring to haul multinational corporations over the coals for not making an appropriate “contribution”, irrespective of the legal position.)

I am not sure that determined libertarians would be convinced by any of these distinctions. But here’s a fourth that might carry some weight: both the tax collector and the bandit redistribute resources, but the tax collector does so far more efficiently.

It was the economist Mancur Olson who most insightfully explored the similarities and differences between a tax-collecting government and a bandit in his book, Power and Prosperity. Olson should have been 81 this week – and possibly would have a Nobel memorial prize in economics to his name – but an early death, 15 years ago, meant that Power and Prosperity was his last work.

Consider two different types of bandit, suggested Olson: the roving bandit, who wanders around pillaging wherever he can; and the stationary bandit, who builds a castle and settles down to exploit a particular area. At first glance, one might think that a stationary bandit is the greater curse, because he’s always around. But not so: roving bandits are more dangerous because they have no reason to hold back. A roving bandit will take everything and leave you dead. The stationary bandit wants to come back and take more next week, and so will ensure you have the resources to keep going about your business.

Because you have everything to fear from the roving bandit, you are likely to take your own steps to avoid him – to hide, to place locks and alarms on everything, or to hire a group of seven samurai to protect you. Meanwhile, anticipating your counter-measures, the roving bandit will also spend resources on his counter-counter-measures. The cost of such arms races can be vast.

The quintessential roving bandit is the pirate – so what is the cost of piracy? A recent working paper by Tim Besley, Thiemo Fetzer and Hannes Mueller tries to evaluate the costs of piracy off the coast of Somalia by examining the rise and fall of shipping costs alongside the ebb and flow of pirate attacks.

Besley and his colleagues reckon that costs of between $900m and $3.6bn were incurred in 2010 as a result either of pirate attacks, or efforts to deter or evade such attacks. Meanwhile the pirates took home just $120m over the same period. Now that $120m does seem to have had some beneficial effects on the pirates’ home ports, according to Anja Shortland, an economist at Brunel University. But piracy is an expensive way to get $120m into the hands of anybody.

There are signs that Somali piracy is on the wane, at least for now. But Somalia remains the poster child for a failed state. And a good working definition of a failed state is one that lacks a decent, long-lived stationary bandit. After all, once a stationary bandit feels secure in his tenure (“long live the king!”) he may do more than show restraint in his plunder: he may begin to invest in the prosperity of the region he dominates, building bridges, establishing a police force and drawing up laws. To maintain his power base he will have to hand out favours and ensure that prosperity is reasonably widespread.

Eventually, the banditocracy becomes a democracy. And a democracy simply cannot afford revenue-raising efforts as wasteful as Somalia’s pirates.

Also published at ft.com.

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