Thursday, December 11, 2014

Domain states, tax states and fiscal states

Have been reading a Ph.D dissertation by Wenkai He on the consolidation of a modern fiscal state in C18th England and late C19th Japan and the failure to do so in late Qing China. (The dissertation has since become a book.) The dissertation references history of public finance literature I was previously largely unaware of. The literature covers domain states and fiscal states (what Joseph Schumpeter apparently called tax states). Wenkai He further divides the fiscal state into the traditional and the modern fiscal state. I would prefer to talk of domain states, tax states and fiscal states, defined as follows:
The domain state: draws income primarily from state-owned property or enterprises such as estates, forests, mines, railways, monopolies, factories, etc. 
The tax state: draws income primarily from taxing economic activity, using its tax revenue mainly as income to meet its current spending, with any borrowing limited to short-term occasional expedients. 
The fiscal state: draws income primarily from taxing economic activity, using its tax revenue as a means to leverage more financial resources, either through issue of paper notes or through long-term borrowings or both.
In other words, fiscal states both rely primarily on taxing economic activity and can deficit finance in a significant and recurring way. The first fiscal states were Song China, the first state to issue paper notes, and the Serene Republic of Venice, which issued the first public bond, the prestiti.

There are no longer any tax states. It was an historical form which, with the universal adoption of paper/plastic notes and development of global capital markets, is now extinct. The Roman Empire, the late Sassanian Empire (at least after the reforms of Khosrau I), the Abbasid Caliphate, the Ottoman Empire, were all tax states. As were Ming and Qing China, as the large scale use of paper notes lapsed after the experience of hyperinflation at the end of the Yuan dynasty and of inflation in paper notes at the beginning of the Ming Dynasty.

Ruling domains
The domain state was the original form of the state. Pharaonic Egypt, Mesopotamian palace-and-temple complex states, the Khmer Empire, were all domain states. But so was the Spanish Empire after the discovery of the Potosi "silver mountain" and other silver mines. So was the Soviet Union. So are Saudi Arabia, Iran and Venezuela. So are Cuba and North Korea. The domain state is far from extinct.

The odd thing is, I had come to various conclusions about domain states without being aware of the term, though having the term is usefully clarifying.

Domain states come in two basic types; those reliant on a single resource (silver, oil) and those reliant on the extraction of labour surplus (agrarian and industrial domain states).

Both forms are [likely to be]* highly ideological and are the more ideological the more the state dominates economic activity. That is, both have a set of ideas that express the status and dominance of the ruling authority, with public adherence to said ideas signalling loyalty to the authority that is economically dominant (and thus has very extensive power to reward or punish by giving access to, or cutting off access to, the revenues it controls). While cults of personality provide a way to signal loyalty when said loyalty is effectively compulsory. Failure to signal loyalty in the required way is likely to make one a target; a useful and public target for signalling the error of not publicly adhering to the status and dominance game of the ruling authority. Said status and dominance being all the stronger as the ruling authority--due to the scale and independence of its revenue--typically has little need to conciliate or bargain with other sectors in the society.

So, if the domain state is religious, it is likely to be very religious--hence the persistence of the Spanish Inquisition and the particularly virulent religious police of Saudi Arabia and Iran. If secular, it is likely to be intensely ideological--as in the Chavismo of Venezuela, the Castroism of Cuba, the Juche of North Korea. Or the Leninism and Stalinism of the Soviet Union, the Maoism of the People's Republic.

Extracting surplus
Domain states reliant on the extraction of labour surplus do so by paying labour well below its marginal product. Pre-industrial (i.e. agrarian) domain states typically did this by tying peasants to the land, although extraction through labour service or corvée was also often used. Hence agrarian domain states are typically addicted to monumentalism: labour service cannot be "stored" from one year to the next, thus it has a "use it or lose it" quality. So a continual series of autocrat-controlled labour service projects signals, manifests and preserves the authority of the autocrat; especially as the monuments themselves typically represent in stone the status and dominance of the autocrat, either directly or by expressing the status-and-dominance symbology.
Jayavarman VII likely used his face on his monumental temple.

Industrial domain states extract labour surplus by controlling the borders and blocking exit. Since the state owns all the enterprises, it can ensure that workers are paid below their marginal product. Which means they can clearly do better elsewhere, hence they have to be blocked from leaving so that they can be paid well below their marginal product. It is exactly the same principle as serfs being bound to the land (whether Spartan helots, late Roman coloni or medieval serfs), except on a much vaster scale.

Which is why, when former domain states transition to fiscal states, they open their borders, even if the same regime remains in power (as in China and Vietnam). No longer reliant on paying people below their marginal product, they are no longer anywhere near as motivated to block exit but very keen to encourage transactions that can be taxed--including cross-border transactions. So, Leninist regimes running fiscal states open their borders, while Leninist regimes running (industrial) domain states close them.

States making societies
The state is not an epiphenomenon of society, but a fundamental moulder of it. States make societies, and societies make states. And the more the former is true, the less the latter is.

Stateless societies either pre-date the state or are created in refuge from it. An option which is no longer open. (Sufficiently cheap space travel--if that is possible--may recreate it; but not if the experience of European colonialism is any guide.)

But the tax, and later the fiscal state, has an interest in encouraging transactions to be taxed. Which (along with various factors in organising military force) eventually led, in Europe, to the creation of the bargaining state. Which was so successful, the idea developed that states were an epiphenomenon of society. But that was a false inference from profoundly anomalous experiences in profoundly unusual (in terms of human history) societies.

It is one of the great historical ironies, that the philosophy (Marxism) which most expressed this notion that the state was an epiphenomenon of society--that it reflected and served the interests of the "ruling class"--in its Leninist variant expressed most completely how false this notion was, as Leninist states created the societies they wanted. Not wanted in the sense of some perfect ideological vision, but wanted to serve the interests of the ruling authority of the state. It was control of the state which made them the ruling authority, they did not control the state because they ruled. Their state made their society. Up to the limits of rival states.

The emergence of the state was the emergence of surplus-extracting hierarchy able to mould society into a form that could support it. States originally made societies rather more than societies made states. Since then, the degree to which states made societies, or societies made states, has been highly varied; but states have never been a epiphenomena of society.

* [Small city-states not so much, since they have a de facto cosmopolitanism more or less imposed on them.]
[Cross-posted at Skepticlawyer.]


  1. What about the smaller Gulf states? For example, Dubai (land) and Abu Dhabi (oil, land) are unquestionably domain states. Yet they are non-ideological, highly open societies.

    1. Good question: small size makes a difference, as it tends to force a form of cosmopolitan openness. Traditionalism can also makes as difference, as it often softens religious doctrine. (Saudi Arabia is not a traditional monarchy.) Dubai in particular is a highly commercial domain, which also makes a difference, as it does not rest on extracting labour surplus by paying under the marginal product.

      I should have said "likely to be ideological".