Extortion or Protection?

By Rens Edwards

Tilly (1985) provides a necessary condition for state making, namely capital accumulation. Without capital, a state cannot afford a standing army. Consequently, without an army, protection of the state itself nor expansion is possible. An essential aspect of capital accumulation for upcoming states was to demand money in exchange for protection. It did not matter to the government whether its people actually wanted protection, the government simply created demand for protection.

When multiple parties exercise violence in an area, the costs of protection increase. Therefore, an important requirement was that a state had a monopoly on violence, or protection would become too costly. This created “protection racketeering”, which meant that “customers” paid a given amount of money for the protection granted by the government. By doing so, the government gained more income which was used to form an army and hence finance war.

In South Africa, protection rackets are still part of everyday life. Protection used to be the responsibility of the state. Nowadays however, South Africa does not have a single body that controls violence. Rather, several private companies and informal protective organizations (mainly criminal groups) exist to provide protection to the people. Most private security companies are legitimate. Some companies however, mostly located in Cape Town, are being operated by infamous underworld figures. Those companies are a threat to society, because they often make use of extortion instead of offering protection. Although the people should be protected from violence, these gangs are a danger to their own society.

In short, protection racketeering in South Africa functions among others as a means for criminal groups to get cash quickly, which instead causes more violence in its bigger cities. These gangs demonstrate how violence can be abused in the absence of a monopoly on violence by the state itself. 

The importance of learning and competition for institutions

By Rens Edwards

In class we discussed three characteristics that make path-dependency effects in politics intense. We touched upon the shorter time horizons and the strong status-quo bias in politics extensively, but we skimmed over the absence of efficiency-enhancing mechanisms of competition and learning. The latter could use some clarification through an example.

Competition and learning as efficiency-enhancing mechanisms can appropriately be applied to economics. In financial markets, firms contend with each other to become the leader in a particular sector, which creates competition. Due to the existing competition, more efficient firms develop which eliminate the firms that cannot keep up. This process causes “auto correction” within the financial sectors. Learning processes also stimulate companies to strive for the highest efficiency. Firms learn from other firms and from themselves to become more efficient.

In politics however, competition and learning are not as straightforward as in economics. Competition does occur during elections, but generally political institutions do not compete with each other to become more efficient. Learning processes occur sometimes when institutions receive feedback on newly implemented policies, but this happens much less frequently than efficiency corrections in economics.

Political institutions in the world of football are a good illustration of inefficient organizations. The FIFA is the main organization, which consists of six sub-organizations including the UEFA. Despite the existence of multiple organizational bodies, almost no corrections have taken place to make the FIFA (or its subdivisions) more efficient. The FIFA simply stayed on the same unethical path, until finally an intervention occurred recently forcing the FIFA to make drastic institutional changes.

The absence of competition and learning is clear in “permissive” political environments like the FIFA. Political institutions generally lack auto-corrective mechanisms, making them more susceptible of pursuing the wrong track.


By Rens Edwards

During the colonial era, Europeans would typically create two kinds of states in countries they invaded, depending on how useful that country was. In countries in which they saw a future for themselves, inclusive states appeared. Inclusiveness meant that more development-minded institutions were created. Extractive states did not provide much protection for things such as private property as its goal was to transfer as many resources as possible from the colonized to the colonizer. The latter occurred in countries where colonizers did not stay permanently.  

The idea of inclusive versus extractive institutions can be extended to the business world. In the business model, the board of directors function as the colonizers and the rest of the employees and shareholders as the colonized. Executives of a business have two options when managing the company. Either, they can choose for a short-term focus or they can pursue a long-term focus. The short-term (extractive) focus involves taking on risky projects that cause high earnings for the near future. This looks good on paper, as earning expectations are met and executives subsequently receive higher bonuses. However, this focus is detrimental to the long-term (inclusive) value of the company, because these companies invest less in research or marketing.

The main reason why executives choose the short-term focus, relates to their compensation. The higher the earnings in a given period, the higher the executive compensation. As a solution, companies should separate executive compensation from the company’s earnings. Otherwise, we see a trend where “elites (executives) that have prospered from inclusive systems can be tempted to pull up the ladder they climbed to the top.”

Similar to the depletion of resources in extractive states during colonialism, companies that become extractive will bleed out financially in no time.