We’ve repeatedly alluded to the role of governments in structuring the economy. The full role of government goes well beyond a single blog post, or even a single book, but we can still lay out a few basic ideas to structure how we think of governments’ role in the economy in our worldbuilding settings. We’ll begin by talking about what ideal governments do, and in a later post we will discuss reasons why the real world often falls short of the ideal.

Let’s begin with a simple inventory:

Providing and enforcing laws. We’ve discussed how commerce thrives in stable societies where the threat of violence and banditry is low, and we can rely on enjoying the fruits of our labors even far in the future. The more secure that property rights are, the more complex commerce tends to become.

Notably, you don’t need a formal government to have and enforce laws. Several societies achieved a degree of social and commercial stability without a formal government, because a customary or religious set of laws was widely agreed upon and followed. Examples were/are the Nuer, Somali tribes following customary law, and the Jewish diaspora. Some societies in a border region even maintained a shared legal code even while at war with each other, such as the Law of the Marches between England and Scotland.

Similarly, it’s not necessary that a territory follow a single law code. In medieval England, the law merchant would compete with royal courts, which in turn competed with the courts of local lords. Today in America, the states often compete to provide laws that are favorable to particular industries, and companies also can use private arbitration to settle disputes.

Still, it seems that formal governments tend to be more effective at maintaining a stable legal system, on average. Or at any rate, the provision of law and order is one of the most compelling justifications that governments can give for their existence.

Providing public goods. How one defines “public goods” strongly depends on one’s level of cynicism, but in general we can say that there are certain kinds of things that governments have historically paid for that often do not get paid for in their absence. Militaries, road networks, and massive irrigation projects and drinking water are typical examples. One of the classic justifications of government is that by levying mandatory taxes and directing unified projects, it can overcome the collective-action problem and ensure that everyone benefits from public goods that everyone wants, but no one is able to fund on their own.

Again, many are quick to label something a “public good” when in fact it could be provided privately, as long as the necessary incentives are created and methods exist to coordinate people and resources. Mercenary units have existed since the dawn of time, and private companies often build roads and water projects if they are able to charge for them. Robert Nozick imagined a contractual mechanism in his Anarchy, State, and Utopia for people to commit money to a project and only be charged if enough other people join, and today we actually do this on crowdfunding sites such as Kickstarter. I myself have hoped for a long time that we could replace much of our tax code with crowdfunded public works (and published a rather amateurish short story on that theme—but we all have our old shames!).

Nevertheless, there is a sense felt by many that certain goods and services ought to be provided collectively, and not through market mechanisms. National defense and crime prevention are prime examples.

Redistribution of incomes. The oldest governments known, in ancient Egypt and Mesopotamia, spent the bulk of their efforts on gathering food and then distributing it to their populaces. Ever since, some level of social support has been practiced by nearly all governments. The scale of such redistribution varied widely between, say, the Soviet Union and Victorian England. But in general, governments usually recognize that their power comes from their (control over the) populace, and that allowing large numbers of people to starve to death does not serve their interests (if it can be prevented cheaply enough, anyway).

Redistribution is expensive, and often bitterly resisted by those who are forced to pay for it. And it is also quite common for redistribution to be manipulated to produce, ahem, unexpected beneficiaries.

Aside from the three roles above, economists typically point to three other roles that seem, to me, rather less universal:

Stabilizing the economy. Economic fluctuations and crises are of concern to states, for several reasons. (But not all states are able to respond usefully; and not all states’ responses are effective.)

In one interesting example, he Babylonian Talmud records that the Temple in Jerusalem would use a portion of its treasury to buy food products if market prices were unusually low, and then sell them to the market once prices rose. [Find the cite.] The text is silent on whether such market activity was meant to be stabilizing; but the profits from such trading were spent on “extra” sacrificial offerings, rather than being retained, suggesting that profit was not the motivating factor.

Maintaining competition (or the reverse!). Often, governments use regulations to prevent markets from being dominated by particular actors. For example, governments might impose a fixed rate on rail freight so that farmers are not squeezed by the rail companies. A city might require that marketplace stalls have a maximum size, so that many sellers can fit in the town square. 

Conventional economists aside, often governments do the opposite: reserve an entire market sector for a designated monopoly. This can be done for purely self-interested reasons (such as to enrich a government minister or an ally), but governments often justify monopolies in situations with high barriers to entry, such as the need to outfit a private navy to deepen trade links with the East Indies, or building fantastically expensive semiconductor plants. Creating a monopoly, it is sometimes believed, can prevent “wasteful” competition in situations where it would yield little benefit.

Similarly, state monopolies are often advocated for in situations prone to “natural” monopolies, such as a water utility that needs to build pipes to every building.

Finally, and most speculatively, we have:

Correcting externalities. Often, commercial activity creates costs that the participants can shift to others, such as pollution or the depletion of natural resources. Since the participants don’t bear the whole costs, they have incentives to act in ways that are, globally speaking, not optimal. Governments often (claim to) act to control such misaligned incentives. For example, the U.S. government has a cap-and-trade system to limit harmful emissions from power plants, and many have advocated for a carbon tax to discourage energy-intensive behavior.

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Now, merely listing the potential activities of governments does not tell you what governments actually do, or why. As we know, governments often have different motivations than the welfare of their peoples. But this post is already going long, so we will discuss a three-part model for government motivations in a future post.

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)