The role of credible commitments in state finance

Margaret Levi's Of Rule and Revenue raises a host of important problems in the theory of the state. It provides an important step in the development of a theory that combines economic and political institutions into the same framework, potentially allowing scholars to address important issues such as the divergent economic paths taken by various states. It will therefore be an important book, and warrants attention. This approach holds much promise for the development of a theory of institutional development of the state from the middle ages onward.I have tried to sketch some additional directions for the theory to develop, pointing toward the answer of questions not directly faced by Levi — or for that matter, by much of the public choice literature: How do we explain the evolution of a predatory state into one with explicit limits on its powers? How do we explain the rise of representative institutions? Answering these questions often requires looking beyond the individual state to its international context. Competition among states, especially in the form of war, plays a key role here, and has two consequences. First, a major consequence of large-scale wars was fiscal stress. At such times, even a preditory state might agree to exchange limitations on its own powers for revenue. Second, the brief discussion of early modern Europe suggests that states with limited government might have had a financial advantage over those which were not so limited. The latter played a major role in the successful Dutch revolt against Spain and in the English defeat of France.