Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

Revenge of the Power Mongers


State-Building: Governance and World Order in the 21st Century

Francis Fukuyama

Cornell University Press, 2004

xiii + 137 pgs.


Francis Fukuyama offers us a most peculiar argument, which as best as I can make out goes as follows. We have learned in the twentieth century that free-market economic systems work better than centrally directed ones. But we should not conclude from this that the state should be drastically limited or done away with altogether. Quite the contrary, the state must be strengthened: overly weak states pose a threat to international order.

Unfortunately, efforts by developed states to help weak states have failed disastrously. This is no accident: bureaucratic organizations face intractable theoretical problems. Nevertheless, state-building must proceed full speed ahead.

Our author sometimes seems fully alive to the virtues of the free market: "The collapse of the most extreme form of statism, communism, gave extra impetus to reduce the size of the state in noncommunist countries. Friedrich A. Hayek, who was pilloried at mid-century for suggesting that there was a connection between totalitarianism and the modern welfare state . . . saw his ideas taken much more seriously by the time of his death in 1992. . . . There was no question that the all-encompassing state sectors of the communist world needed to be dramatically scaled back, but state bloat had infected many noncommunist developing countries as well" (p. 4).

If a state-dominated economy does not work very well, why not cut back the state to the greatest extent possible? Why not see whether the market can supply all social institutions, without the overseeing hand of the state? This seems to me an entirely reasonable course of action; but if you join me in accepting it, I fear that we will not qualify for a Professorship at the Paul Nitze School of Advanced International Studies at Johns Hopkins University.

Fukuyama, who holds an endowed chair at that distinguished institution, shows us the error of our simplistic line of thought. The manifest failures of the command economy show only that the scope of the state should be restricted. It should not undertake to do too much: but in its proper functions, it must be strong, not weak. The state must, at a minimum, provide law and order and defense. It must delineate property rights and enact public health measures that the market cannot handle. Opposition to the state must not be carried too far: if the government takes a large proportion of per capita Gross Domestic Product, we are on the right course.

Readers of the Mises Review will not be surprised to learn that I cannot find these considerations decisive. Fukuyama displays no grasp of what is required to show that state provision of these various goods is needed. He claims, e.g., that sub-Saharan Africa in the last quarter of the twentieth century illustrates the dire results that ensue if a state is in "quadrant III"—a situation in which the state is too weak to provide essential services. What he presents to defend this claim, though, in point of fact supports an entirely different thesis: "It is common to characterize regimes in sub-Saharan Africa as ‘neopatrimonial’—that is, with political power used to service a clientelistic network of support of the country’s leaders. . . . In some cases, as with Mobuto Sese Seko of Zaire . . . a large part of society’s resources are stolen by a single individual. In others, it merely amounts to rent-seeking—that is, the use of the public sector to reallocate property rights to the benefit of a particular interest—that is directed toward a single family, tribe, region, or ethnic group" (p. 16).

Could a proponent of Rothbard’s anarcho-capitalism have selected a better example to show the danger of "our enemy, the state"? Yet to Fukuyama, the existence of a predatory state proves that the state is not strong enough to carry out its proper functions.

Our author, in his most famous book, The End of History, showed himself a gifted expositor of Alexandre Kojève’s Hegelian arguments; but perhaps he should at some point in his progress toward the School of Advanced International Studies have paused to acquire some training in ordinary logic. He thinks that this is a good argument for high taxes and a strong state: "[T]here is a fairly strong positive correlation between per capita GDP and the percentage of GDP extracted by governments . . . richer countries tend to be ones that funnel higher proportions of national wealth through their state sectors . . . there are any number of countries that would like to be able to take in a higher proportion of GDP in taxes but are unable to do so because they cannot monitor tax compliance and enforce tax laws. That a strong positive correlation exists between tax extraction and level of development suggests that overall, the negative effects of excessive state scope are in the long-run counterbalanced by the positive effects of greater administrative capacity" (pp. 20–21).

An alternative explanation of the correlation—I here assume that Fukuyama’s figures are accurate—readily suggests itself. Only a strong, and thus at least relatively free, economy has the capacity to support an extractive state that drains a large percentage of people’s resources. If the economy is weak, attempts to impose high taxes will lead to total collapse. Taxes are always a drag on the economy: the developed nations would do even better without high taxes.

I of course prefer my own suggestion to Fukuyama’s, but the point here is not to urge its merits. Rather, I wish only to advance an uncontroversial claim. Fukuyama, if he is to make good his contention, must compare his hypothesis with rival explanations. His failure to see the need to do so manifests his utter lack of comprehension of acceptable reasoning in the social sciences. Has he ever come across the maxim, "a correlation is not a cause"?

Let us put all this to one side. Suppose, manifestly contrary to fact, that developing countries need strong state institutions of the sort that Fukuyama suggests. Our author thinks that weak states pose an international menace: the developed states must aid them to advance. But can they do so?

Fukuyama himself suggests that they cannot. He uncovers a contradiction in the aims of aid to weak and undeveloped countries: "The contradiction in donor policy is that outside donors want both to increase the local government’s capacity to provide a particular service like irrigation, public health, or primary education, and to actually provide these services to the end users. . . . While many donors believe they can work toward both goals simultaneously, in practice the direct provision of services almost always undermines the local government’s capacity to provide them once the aid program terminates" (p. 40).

In brief, the weak states cannot by themselves devise the programs Fukuyama wants; if the strong states do the work themselves, the weak states will not progress. The goal—it is of course Fukuyama’s, not mine—cannot be achieved. Nevertheless, the strong states must proceed with this futile course.

The situation is even worse. Not only are weak states unable to provide the needed institutions: bureaucratic institutions inevitably find themselves entangled in intractable difficulties. Among these is the notorious agency problem. How can we insure that bureaucracies carry out the instructions given them? In particular, some activities cannot readily be monitored. "Specificity refers to the ability to monitor a service output. . . . If a mechanic is incompetent, there will be immediate consequences. By contrast, high school guidance counseling is a service with very low specificity" (p. 56). Fukuyama plausibly suggests that activities with low specificity and a high volume of transactions will be difficult to control. These include many of the "public goods" he claims that the state should provide.

If, because of this difficulty, the state cannot supply efficiently the public goods Fukuyama wants, why not abandon the quest for a strong state? Fukuyama cannot take this simple and obvious step, because for him the provision of all services by the free market is not a live option. Instead, he thrashes about for a statist solution. Perhaps shared norms will do the trick. If the members of an organization can be induced to commit themselves strongly to its goals, maybe state agencies can perform in adequate fashion.

But, it transpires, this too fails: "while norms can be used to align agent incentives with those of the principals, they are a double-edged sword. Norms can imbed the interests of the principal . . . but they tend to take on a life of their own. Group identities and loyalties tend to crowd out consideration of other interests, including the interests of the organization to which the group is nominally subordinate" (p. 65).

Can we solve the problems of bureaucracy through the wisdom of Hayek? He has taught us that large, centralized organizations cannot handle the mass of information required to run a complex economy. Hayek "noted that the vast majority of information used in an economy is local in nature, having to do with the specific conditions that are usually known only to local actors" (p. 68). If so, we must decentralize: let us have a strong state organized on a federal basis.

Once more, Fukuyama holds, our problem remains unsolved. Decentralization has undoubted advantages, but it entails grave drawbacks as well. "The most important drawback of decentralization concerns risk. Delegation of authority inevitably means delegation of risk taking to lower levels of the organization" (p. 71). A very lower level official can in a decentralized organization sometimes bring the whole organization to ruin through rash action.

Another problem rivals this in severity. Delegation of authority sometimes "means [that] some subordinate units will fall below a minimum threshold of tolerability. . . . In a more mundane fashion, the delegation of authority to state and local government in developing countries often means the empowerment of local elites or patronage networks that allows them to keep control over their own affairs, safe from external scrutiny" (p. 71).

Fukuyama’s account of organizations suffers from a crucial flaw. He fails to grasp that the free market solves the problems to which he has called attention. He asks, how much centralization do we want in an organization? How can we ensure that agents follow the instructions of their principals, without destroying local initiative? There are no answers to be found: organizations, in his view, are always faced with conflicting goals. He had only to study Mises’s brilliant Bureaucracy to find the answer to his problems.

As Mises pointed out, all business decisions must justify themselves by their effects on profit. Has a firm been decentralized "too much"? If so, it will lose money: other firms, with a structure of control better adapted to market success, will tend to supplant it. Market success offers a fixed criterion by which entrepreneurs can decide the best way to pursue the conflicting goals to which Fukuyama has called attention.

An example that Fukuyama himself gives illustrates this crucial point. To show the dangers of decentralization, he mentions the policy of Sears Roebuck in the 1950s. "This decentralization continued until some local Sears auto service outlets engaged in a bait-and-switch operation that undermined the integrity of the Sears brand name" (p. 71). But what happened after that? Did not Sears suffer losses because of this mistaken policy? Here precisely is the corrective mechanism that the market provides. No such check is available to government bureaucracies, and that is Mises’s point.

Since Fukuyama does not grasp this, he is at wit’s end and can only exhort state-builders to do the best they can. Has he not constructed for himself an insoluble problem? Bureaucratic institutions cannot, on Fuku-yama’s own showing, achieve the task he has set them. Why then does he persist in his futile quest? Why does he not acknowledge, "I want the developing countries to have strong states, but no means exist to achieve this goal. Weak states must then be left to fend for themselves."

For Fukuyama, weak states pose a grave danger to the United States. "The problem that faces the United States is that failed governments can create intolerable security threats in the form of terrorists wielding WMD [weapons of mass destruction]" (p. 98). I do not suggest this danger is imaginary; but, as Fukuyama presents it, the danger is a mere speculative possibility. If we are to undertake massive efforts in "state building" to counteract it, do we not require some estimate of the likelihood of the danger? Instead, in typical neoconservative style, the bare possibility of a threat suffices to justify a massive statist venture—in this case, a venture that its own advocate admits to be futile. n MR



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