State Capacity, Endogenous Design, and Exogenous Wealth

What is state capacity still capable of contributing to modern economies? In some important respects, state capacity is no simple matter. Yet there is plenty of wishful thinking on both sides of the political aisle, as to what governments "should" be able to accomplish for long term growth and prosperity.

Not so long ago, the governments of advanced nations were better positioned, for fiscal policy to function as an active component of economic dynamism. However, as commitments to special interests and citizens in general have grown, fiscal policy has gradually become better suited as an economic stabilizer, than for additional growth prospects.

Perhaps this is a reasonable outcome, for national governments which have long depended on endogenous monetary design. Much of this capacity exists quite separately, from the vast exogenous monetary wealth that extends well beyond national borders. Yet the more tangible nature of the latter is largely due to tradable sector activity as our primary source of wealth origins. Consider how crucial are the roles of exogenous monetary wealth. Should any global calamity reduce this capacity, the ability of national governments to function normally via fiscal policy would be immediately compromised. Despite the supporting role of governmental endogenous design, exogenous wealth generation is still central to long term economic stability.

Nevertheless, the relationship between endogenous and exogenous sources of wealth has become so complex, one can be forgiven for imagining monetary realities as solely endogenous in nature. The main problem with endogenous monetary creation, is that populations can become too dependent on future forms of resource reciprocity, making individuals less inclined to seek direct reciprocity with others in the present. Even though future commitments in the form of monetary wealth can be quite versatile, they should not be be relied on to such an extent that people forget how to apportion time and skill for mutual reciprocity in the here and now.

Too much reliance on endogenous future wealth to fund today's services, may lead to excess passive monetary holdings in the GDP of nations. The dynamics of general equilibrium are essentially defined by interactions between the primary markets and the secondary services markets of future obligations. When expectations become too rigid in secondary market flows, sectoral balance is gradually disturbed. Today, there are rigid expectations in housing and time based services, which have contributed in turn to outsized expectations elsewhere in the economy - for instance levels of income supposedly now "necessary" to live normal lives.

Any efforts to expand on state capacity in the present, are going to run headlong into these expectations which have led to extensive budgetary obligations and social commitments. Producers and consumers alike are heavily vested in these particular alignments, which largely define how domestic wealth is constructed. In a post which reflects on state capacity, Scott Sumner explains:

...one aspect of state capacity is the ability of countries to act in a way that is seen as desirable by a consensus of people who don't have a special interest to inhibit change. A government that is able to "do the right thing" has more state capacity than one that does not, even if somewhere between 1% and 40% of the time the "right thing" turns out to be wrong.

Once societies rely on inefficient centralized coordination patterns, citizens move further away from a consensus on how those patterns should function - all the more so when millions of citizens are involved. Scott Sumner has often noted his own belief that a nation's democratic potential to achieve the "right thing", is likely only feasible in decentralized settings.

However, part of the problem for decentralized decision making in the use of knowledge and skill, is that special interests in the 20th century sought out national protection for how skills and knowledge could be utilized at local levels. Consequently, the U.S. may not be able to devolve important skills and knowledge use decisions to local levels in the near future, in a general equilibrium capacity. For this reason, I've suggested defined equilibrium settings which could create more accessible environments for human capital potential.

Time arbitrage would make it feasible for local citizens to gradually build stronger forms of democratic governance. Possibly the greatest benefit of time as symmetric wealth value, is that it would allow time to function as an exogenous or original source of wealth. Ultimately, time arbitrage could build upon decentralized settings in ways reminiscent of the organizational capacity of tradable sectors.

The knowledge use systems of time arbitrage, would make it possible for participating groups to bring aggregate time value into better balance with other forms of exogenous monetary wealth. Once time units become capable of purchasing other time units, the resulting new commodity standard would allow time to function as a reliable wealth source. Time as direct resource reciprocity would place (gently guided) mutual assistance into tangible and primary market forms. As an exogenous wealth source, time arbitrage could gradually help to reduce the political pressures and expectations that state capacity now faces.