The Cartel System of States

Avidit Acharya Alexander Lee

May 15, 2019 2 Contents

1 Introduction 5 1.1 A View from the U.S.-Canada Border ...... 5 1.2 The Questions ...... 6 1.3 The Inadequacy of Existing Theories ...... 9 1.3.1 Ideational Theories ...... 9 1.3.2 Conﬂict and Cooperation in International Relations ...... 11 1.3.3 Theories of State Building ...... 12 1.4 The Cartel Theory ...... 15 1.5 The Plan of this Book ...... 18

3 4 Chapter 1

Introduction

1.1 A View from the U.S.-Canada Border

Niche, North Dakota and Gretna, Manitoba are two small communities of a few hundred people each that lie on opposite sides of the U.S.-Canada border. They are both old communities. Gretna was settled early in the 19th century soon after the Anglo-American convention of 1818 established the 49th parallel as the U.S.-Canada border in that region. Although Neche was laid out several decades later, Pembina county to which it belongs contained the first settlement of the Dakota territories, having been settled as early as the 1780’s. The two communities are very similar—and they each others’ nearest communities. Their residents frequently cross the border, for example to buy gas in Neche, or eat out at Nora’s Diner in Gretna. But at the same time, their residents face very different political-economic circumstances. The residents of Gretna are Canadian residents, are subject to Canadian laws, pay their taxes to the various tiers of Canadian government, and enjoy access to Canadian public goods and services such as universal healthcare. The residents of Neche, on the other hand, are residents of the United States, subject to American laws, paying their taxes to various tiers of American government, and enjoying American public goods and services such as the high quality American roads that connect the denizens of sparsely populated plains and Western states, and access to institutions of American education including public schools and universities. The differences in these circumstances reflect the significance of an international border, especially in parts of the developed world where such borders have come to reflect sharp, discontinuous changes in political authority. Consider another example, that of Point Roberts, Washington on the southern- most tip of the Tsawwassen Peninsula, just across the Strait of Georgia from mainland Washington. Residents of this enclave must cross the U.S.-Canada border twice when traveling to other parts of the United States. Because of this inconvenience, the residents of Point Roberts do much of their shopping for goods and services in

5 Canada. Nevertheless, some important Canadian services are not available to them. For example, the town has no hospital, doctor, or dentist, and American insurers do not pay for coverage by Canadian healthcare providers. In cases of emergency, the residents of Point Roberts seek care in Bellingham, Washington, even though Vancouver is much closer. Enclaves like Point Roberts exist around the world, for example the Cooch Bihar or West Berlin. But it is not only their status as enclaves that these places are curious to us. Our puzzle over the challenges of life in an enclave stems from the political importance of international borders. Were it the case that the residents of Point Roberts could simply travel to Vancouver and easily receive all of the services not available to them in their community, their life would be much easier and we may be less surprised by the existence of such an enclave. But this is not the case.

1.2 The Questions

International borders represent one of the most tangible features of the international state system, a system that exists now almost universally, and which we take for granted. What explains this fact? Why are the citizens of border regions that happen to lie across a political border often subject to very diﬀerent governance systems? These questions are the subject of this book. To put these questions in perspective let us consider ﬁrst the possibility of some hypothetical counterfactuals, second that today’s territorial state system in which borders are such sharp and meaningful political demarcations is a relatively recent institution in human history, and third that only in a few remaining instances (mostly parts of the developing world) borders exist but are not the sharp demarcations we may be accustomed to in the vast majority of the world’s regions.

6 Imagine, for a moment, a world in which the residents of towns on the U.S.- Canada border could decide for themselves if they wanted to pay a portion of their taxes to the Canadian government to “buy in” to Canadian healthcare while paying another remaining portion of their taxes to the U.S. government to enjoy access to American public services, such as the ability to enjoy in-state tuition in their state’s public colleges. We could even ask this question of cities, towns and communities that are not border communities. Why can’t public services be bought piecemeal, on an a-la-carte basis, with governments competing with one another to provide higher quality services at the lowest cost, in a sort-of marketplace for public goods? What impact would this competition have on citizen-welfare? Presumably, this competition would be good for citizens since governments would be compelled to provide more and better services at lower costs, or else be driven out of the market. Why don’t or why haven’t citizens living in two thriving bordering democracies demanded such a competitive market system in the provision of governance? The idea citizens choosing their governments the way they choose their diners or gas stations, as the residents of Neche and Gretna do, may seem nonsensical. In the 21st century world, we are conditioned to ﬁnd sharp discontinuities in political authority as both natural and desirable. However, in not too distant history, political boundaries did not mark the absolute changes in political authority that they do today, and residents of border regions were, in some cases, subject to the laws and authority of both neighboring rulers, and in other cases, subject to neither because they could choose which of the two neighboring states’ laws they would abide by and which they would not. The Dukes of Burgundy, for example, were vassals of both the French monarch and the Holy Roman emperor, with obligations to both. At the same, they were able to build up a large political unit in the 15th century in the borderlands between France and the Holy Roman Empire by skillfully negotiating their position between the two sides. In the medieval period in Europe, the haziness of medieval political boundaries meant that lords and towns located between larger polities maintained a considerable amount of autonomy. At the same time, the most powerful rulers refused to accept the idea that their authority ceased at some point in space, and claimed “universal dominion.” Under Roman rule, most of Europe had been organized into a single polity that claimed to rule the whole world. In the Middle Ages, both the papacy and the Holy Roman Empire used this precedent to make similarly extravagant claims. Even after the administrative machinery of the Empire had already become decrepit, the Latin motto of Austriae est imperare orbi universo (“all the world is subject to Austria”) featured prominently on Hapsburg iconography. Perhaps the most far reaching claims came from the papacy, as for example, Pope Gregory claimed in the Dictates Papae (1075) that he has the power “(12)... to depose emperors,” and “(27)... to absolve subjects from their oath of ﬁdelity to wicked rulers.” (Ogg 1907). Outside of Europe, Chinese emperors of the Qing era claimed to be superior to all other polities, and treated their

7 relations with foreign peoples as “tribute” paid by barbarians to the emperor, while the Holy Roman Emperor claimed authority over all of central Europe while aspiring to control the whole world.1 The system of hierarchical sovereignty in Europe and across the world looked markedly different than the one by which states are organized today. While the great empires claimed the world, most smaller polities claimed something less than the “sovereignty” thought to be associated with modern states. Medieval Europe, Tokagawa Japan and Mughal India contained hundreds of lordships and cities who exercised autonomous political authority, raising taxes and making war much as modern states do. At the same time, these units acknowledged the partial authority of higher level political authorities, perhaps paying them some tribute, sending contin- gents to their wars, and allowing appeals to their courts. The Holy Roman Empire, in 1792, comprised 80 princes, 120 ecclesiastical princes and prelates, 66 imperial cities, and some 2,000 imperial knights, all claiming to be “sovereign”, while at the same time acknowledging that they were part of a larger whole (Lee, 2005, 71). These types of independent local lords were particularly powerful in borderlands like Burgundy and the transitional zone between England and Scotland, where they played larger sovereigns off against each other to gain autonomy and low taxation for themselves. All of this changed, gradually in the last several centuries. In this time, the world witnessed the gradual formation of a system where borders have come to possess sig- nificantly greater political meaning—a system of territorial states. In the words of Stephen Krasner, “the clearest storyline of the last thousand years is the extruding out of universal alternatives to the sovereign state” (Krasner, 1993, 261). Most borders were formally demarcated on the ground and recognized by both parties, while universal claims have been abandoned as old fashioned and inconvenient. Border elites were crushed, and the areas that they controlled administratively assimilated to the rest of the polity. While the intervention of more powerful states in less powerful ones never ceased, these interventions have become cloaked in an elaborate regard for the absolute, autonomous sovereignty of even powerless states. Yet, the sharp meaning of international borders has not spread fully to all parts of the world. In many parts of the developing world, governments attempt to exercise some sort of political power outside the boundaries assigned them on world maps— in fact, in some cases there may not be mutually agreed borders on world maps. Residents of the zones of weak state presence and unclear political authority between Afghanistan and Pakistan and the disputed and ambiguous boundary between Sudan and South Sudan, for instance, may be able to choose to which of these governments or their local proxies they owe their primary allegiance to, and may face demands from both sides for taxes and military support. In these cases, the “border” is less a line than a broad zone of disputed and ambiguous political authority. Nevertheless, these types of border zones are usually regarded as dangerous exceptions to the “normal” operations of the state system in most of the rest of the world.

8 Given these facts, the questions that we are concerned with in this book are: What is the territorial state system? How does it maintain itself? And, perhaps most importantly, why does it exist? These are questions that have been asked and answered before. But the answer that we will give in this book is novel, and provides a new lens by which we can understand this basic feature of modern political life.

1.3 The Inadequacy of Existing Theories

We are not the first to ask questions about how to understand the territorial state system, nor are we the first to give answers. But the answers that have been given are not quite adequate to understand the puzzles that motivate us. Some authors have focused on explaining the origins of the system, without explaining what makes it persist and how rulers and states have used it to organize politics. Others have focused on understanding how the system structures relations between rulers, neglecting the relations that citizens have with multiple rulers. While the literature provides some useful lenses by which to view the system, no existing theory explains why citizens of border areas like Niche and Gretna cannot acquire piecemeal public services from neighboring governments if doing so would improve their welfare. We first cover the existing theories before outlining our own.

1.3.1 Ideational Theories Perhaps the most influential theory for the development of the modern state system is the Westphalia hypothesis: the idea that the Peace of Westphalia (1648) engendered the norm of territorial sovereignty, and therefore marked a critical juncture in the development of the modern state system. The origins of the Westphalia hypothesis lie in a 1948 article by Leo Gross (1948) published in the American Journal of International Law and influenced the view of numerous scholars of international relations from diverse camps.2 Proponents of the Westphalia hypothesis have pointed mainly to three articles in the the Treaties of Onasbruk and Muenster that comprise the Peace. These are Article 64, which states the rights of princes to choose the official religion of their principalities, 65, which states that they may conduct their own foreign policy, and 67, which states that they can set domestic policy. However, as Andreas Osiander (2001) and Stephen Krasner (1993) have argued, these articles neither granted the princes rights that they did not already have, nor did they materially change the way the princes conducted their affairs within the Empire. They, along with other skeptics, have challenged the Westphalia hypothesis on three grounds.3 First, the provision to allow the states to adopt their own religion had already been stated in the Treaty of Augsburg (1555). Moreover, religious conflicts persisted well after 1648. Second, the constituent states of the Empire had the ability

9 to set domestic and foreign policy even prior to the end of the Thirty Years War, as per the landeshoheit system practiced at least since 1519. At the same time, it was not until the 19th century, after the Napoleonic wars abolished the Empire, that the princes became fully sovereign. Third, and perhaps most importantly, there is no evidence that any historian, diplomat, emissary, or ruler prior to Leo Gross cited the Peace of Westphalia as a source for the norm of territorial sovereignty, rather than a legal precedent aﬀecting particular territories. Perhaps aware of the lack of evidence that the Peace of Westphalia led to institutional changes toward territorial sovereignty, Gross (1948) himself wrote that “it would seem appropriate to search not so much in the text of the treaties themselves as in their implications, in the broad conceptions on which they rest and the developments to which they provide impetus” (p. 26). The argument, according to its originator Leo Gross (1948), is therefore that the Peace of Westphalia was an ideational watershed in which new ideas of sovereignty took shape. Whether or not the Peace of Westphalia in particular marked an ideational watershed, it is possible that territorial state system nevertheless developed as a result of an encounter with new ideas that resulted in a change in norms and ideology. This is a widely held view in international relations theory, supported by numerous authors, even those who do not explicitly endorse the Westphalia hypothesis. Ruggie (1993) writes, for example, that “the mental equipment that people drew upon in imagining and symbolizing forms of political community itself underwent fundamental change” and that “historians of political thought have long noted the impact on the emerging self-image held by European territorial rulers of a new model of social order” (157). Philpott (2001) echoes this view, claiming that “revolutions in sovereignty result from prior revolutions in ideas about justice and political authority” (4). There are also many theories of why and when these ideological changes occurred. Nexon (2009) discusses the role of the Reformation in changing the ideological basis of European politics in this period in a way that made the “composite” polities common in the early 16th century obsolete. Osiander (1994, 281) argues that the French Revolution represented the most important watershed, but only in the context of a gradual long-term evolution of political ideas that led the development of “a shared, rather elaborate code of structural and procedural legitimacy” (279). A closely related argument is that the ideas about territory and technologies for demarcating space changed in the Early Modern period, making “modern” territoriality ideologically possible. Political geographers have been especially active in examining the ways in which ideas about territory and territoriality evolved over time (Agnew, 2009, Larkins, 2009, Elden, 2013). They argue that territory, and particularly the bounded, less hierarchical idea of sovereignty, was an idea that had to be constructed. However, relative to Philpott (2001), the geography literature is less explicit in stating that these ideational changes caused the state system to develop, instead focusing on describing the ideological changes that occurred.

10 Despite these perspectives, some authors express skepticism about the primacy of ideas, suggesting that state-building altered political theory rather than the reverse. Krasner (1993) is among the skeptics, arguing that ideas were simply “legitimat- ing rationales” that rulers could draw on to provide legitimacy to actions that they undertook primarily in their material self-interest. He writes:

“Initially, the ideas [of sovereignty] were just hooks to justify actions that were motivated by considerations of wealth and power, not by visions of justice and truth. European leaders were fortunate in having many hooks because of the diversity and richness of European intellectual traditions.” (257)

At the same time, authors sympathetic to ideational arguments also agree that the self-interested motives also played a role, at least for some actors. Osiander (260), for instance, believes that private correspondence of Cardinal Richelieu and his allies in the Thirty Years War show a desire for self-aggrandizement much more than they do a commitment to any ideal of political order. More subtly, Nexon (2009) argues that the ideological changes of the Reformation were important precisely because of the way in which they interacted with existing patterns of non-religious political contestation. Evaluating the causal impact of new ideas is difficult. We do not deny the important possibility that the ideas that succeeded and spread were both shaped by material interests, and in turn had an influence on the way rulers construed their interests. But if new principles were the primary drivers of change, rulers should have an incentive to adhere to the principles; that is, those principles should be self- enforcing. Otherwise it becomes difficult to explain not just why these principles spread but also why the stability of a system built upon these principles would not gradually be undermined by rulers realizing their interests in violating them. Herein lies the missing element of ideational theories, one that our theory will provide.

1.3.2 Conﬂict and Cooperation in International Relations While the state system is a basic analytical concept of international relations, it is one that this often taken as exogenous. Classic theories of international relations treat the state as the a strategic actor, without examining how these actors emerge (e.g. Fearon, 1995, Waltz, 2001, Walt, 1990). Other approaches may similarly treat additional aspects of the contemporary state system, such as norms of non-interference, formal institutional equality, and territorial demarcation, as structural features of the system (Agnew, 1994, Wendt, 1987, Ruggie, 1993).4 This is not to say that territoriality is an understudied subject: The literature on boundaries and boundary disputes is enormous, and growing (Schultz, 2013, Carter and Goemans, 2011, Abramson and Carter, 2016). However, studies of territorial

11 conflict can ignore its comparative rarity in the contemporary world. Consider, for example, the fact that outside of Antarctica, nearly every square inch of land in the world belongs to a state, but the fraction of land that is claimed by more than one state is less than 1.6% (based on Schultz, 2015, in the year 2000). International relations theorists who focus most of their attention on explaining and understanding conflict, have decided to view the glass as half empty, but in fact the glass is 98.4% full. Similarly, interstate conflict as a whole has been in decline, though the reasons for this are hotly debated (Gleditsch et al., 2002, Lacina et al., 2006, Pinker, 2011, Maoz and Russett, 1993). Unlike much of international relations theory which focuses on conflict, our task is explain the enormous cooperation between states that defines the modern territorial state system. One can, of course, argue that the desire to avoid conflict is the key factor in the emergence and stability of the state system. The last several centuries have been a period of period of rapid change in the capabilities of states to make war, administer justice, and collect revenue (Gennaioli and Voth, 2015). Potentially, states could be so intimidated by the escalating costs of conflict that they would cooperate to avoid it, by adopting technologies that reduce the probability of disputes (such as demarcated borders) or developing norms that encourage the non-violent resolution of conflict (Wagner, 2010).5 According to this view the territorial state system exists mainly to avoid violent conflict. There are several reasons to be skeptical of this theory. First, it is not clear that such an arrangement would be stable in the medium term. The more powerful player in any dyad would have strong reasons to use the threat of conflict as a bargaining tool, particularly against weaker neighbors and in more important disputes. Secondly, it does not indicate why border should be territorial, rather than use one of the other models of international organization described by Spruyt (1996). If Canada and the United states wished to avoid conflict, they could agree not to fight each other, this would not necessarily lead to a rigid administrative demarcation. And in thinking about the origins of the state system, if the state system originated in the 17th century to limit conflict, it did not really do a good job of this because wars persisted well into the 20th century, which saw some of the most devastating conflicts in human history. What the state system did accomplish almost from its inception centuries prior is controlling and limiting the choices of individual autonomy especially in border areas. This it did accomplish.

1.3.3 Theories of State Building The existing scholarship on the growth of the state in Early Modern Europe is vast. So-called bellicist perspectives trace variation in the formation of states to variation in the incidence of international conﬂict, which incentivized the construction of an expanded set of institutions to administer permanent armies and navies, and raise

12 the taxes to support them (Tilly, 1985, 1992, Bean, 1973, Centeno, 2002, Hintze, 1975, Thies, 2004, Scheve and Stasavage, 2016, Queralt, 2018). The bellicisits have been opposed by scholars who argue that economic factors (Abramson, 2017), chance (Acharya and Lee, Forthcoming) or social class configurations (Anderson, 1979) were more important in predicting the growth of state institutions, or that the effect of conflict was conditional on some other factor (Lee and Paine, 2018, Karaman and Pamuk, 2013). Other scholars, have focused on role of the specific institutional innovations associated with effective states, including rationalized bureaucracies (Weber, 2015, Brewer, 1990, Brambor et al., 2016, Beik, 1985), personal loyalties (Strayer, 1970) constraints on the executive (Acemoglu et al., 2005, Dincecco, 2011, 2015, Downing, 1993, Ertman, 1997, Mares and Queralt, 2015). These accounts focus on the origins of states as institutions: How the entourages of medieval warlords evolved into elaborate and highly effective bureaucracies. They do not provide an explanation for the emergence of a state system. Why do polities, instead of attempting to conquer each other, make mutually recognized borders and then refuse to administer any territory outside those borders? Why is increased effectiveness in extending authority over ones own population correlated with a remarkable forbearance in dealing with other polities? What makes this question interesting is that the existence of effective state institutions in neither a necessary nor a sufficient condition for a state being treated as an effective, sovereign member of the state system, and treating others as such. Contem- porary Somaliland, for instance, has institutions for taxation and territorial control that are as or more effective than many other African states, but is recognized by no other state, as is treated by international system as an illegitimate interloper, despite it’s claims to sovereignty (Lalos, 2011). similarly, out side of Europe the introduction of Early Modern military innovations such as gunpowder was not accompanied by the development of a sovereignty norm. In fact, the so-called “gunpowder empires” of 17th century Asia, such as the Ottomans and Qing used the new technology to repress local rulers and build large polities that explicitly claimed universal dominion (McNeill, 1989). some of these states, particularly the Qing, also made moves toward homogenous internal markets and administrative rationalization similar to contemporary developments in Europe. There are even more examples of states that are treated as sovereign by the state system, but have little control of what goes on between their borders. Jeffrey Herbst (Herbst, 2014) famously argued that African states have systematically failed to collect taxes and monopolize force within their boundaries, a result of both geographical difficulties and the flawed institutions inherited from colonialism. Other authors have found extensive and deep seated variation in the capacity and “quality” of state institutions in other parts of the world (Lee and Zhang, 2017, Besley and Persson, 2009, Lee, 2019, Migdal, 1988, La Porta et al., 1999, Evans, 1995, Fearon and Laitin, 2003) itself partly a product of historical factors (Lee, 2018, Lee and Schultz, 2012, Gen-

13 naioli and Voth, 2015, North, 1973, Michalopoulos and Papaioannou, 2013, Foa, 2016, Sokoloff and Engerman, 2000). Many states take this weakness a step further, with large areas controlled by rebel groups (themselves unrecognized by the state state system), who ignore the authority of the government. At the extreme, this may mean that the internationally recognized “government” may control little more than a few blocks around the presidential palace. However, by a process of “organized hypocrisy” (Krasner, 1999), other more powerful states treat these states as fully equal to them in a juridical sense, and acknowledge their right to complete sovereignty within a set of borders that are difficult or impossible to change. Spruyt (1996) represents the main attempt to relate the institutional changes emphasized in the existing literature to the question of systemic change. Spruyt (1996) argues that differences in capabilities across institutional forms to make war, administer justice, and collect revenue were crucial for “the victory of the sovereign state” (154). The main portion of Spruyt’s argument shows that variations in trade created alternative political forms in some parts of Europe during the Middle Ages. However, in Chapter 8, he addresses our question: why these alternative political structures were eliminated during the early modern period, in favor of the modern territorial state system. To answer this, Spruyt’s (1996) focuses on competition and selection among states rather than cooperation. For him, the sovereign, territorial state had “institutionally superior arrangements” (32) relative to city leagues and large empires, particularly in their ability to wage war.6 Moreover, the organization of territorial states was incompatible with other forms of political organization and authority, whose claims they did not respect. Spruyt (1996) holds that changes in the internal structure of states changed the state system as “sovereign states selected out and delegitimized actors who did not fit a system of territorially demarcated and internally hierarchical authorities.” (28). Combined with the superior resources of the sovereign state, over time this delegitimization would lead to non-territorial polities being selected out through “mimicry and exit” (171). One shortcoming of this argument is that improvements in the economics of coercion or taxation, even uneven ones, are not guaranteed to lead to a territorial state system. In fact, improvements in military and administrative capacity are compatible with both claims of universal empire and the practice of mixed sovereignty. This claim receives support from the fact that outside of Europe, the introduction of Early Mod- ern military innovations such as gunpowder was not accompanied by the development of a sovereignty norm. In fact, the so-called “gunpowder empires” of the Ottomans, Safavids, Mughals, and Qing used the new technology to repress local rulers and build large polities that explicitly claimed universal dominion (McNeill, 1989). Some of these states, particularly the Qing, also made moves toward homogenous internal markets and administrative rationalization similar to what Spruyt describes in Europe.7

14 Therefore, while Spruyt’s selection argument provides an explanation for why some polities (like France and Spain) succeeded while others (like the Hanseatic League) failed, it does not explain why the successful, institutionally superior states subsequently recognized each other’s claims rather than continuing the process of “selecting out” the weaker states. Many states eventually ceased to claim all the territory that they could potentially have administered, or to which they might have laid claims. In particular, even if we accept that territorial polities are ideologically incompatible with city leagues, Spruyt’s theory leaves unexplained why territorial polities would be compatible with each other in the long run. This is precisely where our theory will complements his.

1.4 The Cartel Theory

In a nutshell, our argument is that the territorial state system represents an economic cartel. It is an agreement among rulers to divide what we refer to as the “market for governance” in ways that reduce competition and deter entry, at the expense of their citizens. It exists because rulers are forward-looking and self-interested revenue maximizers, always seeking to find ways to maximize their power over their subjects, and raise more money. Given this, their interest in creating monopoly power through the mechanisms of oligopolistic cooperation should come as no surprise. We set out a neoclassical theory of the state, where rulers provide “governance” (a package of services starting from protection, to dispute resolution, to modern public goods and infrastructure) to citizens. Since they are the only providers of coercion, rulers can force citizens to pay the price they choose for a set of services that they choose, constrained only by the (often high) cost of individual exit. A key premise of our theory is the market for governance has the potential to be competitive. Individuals facing tax demands that they consider too high relative to the benefits they receive may instead join another polity. Individuals placed between two polities can play them against each other, demanding more services or less taxation in return for their allegiance. The tax rates paid by individuals are thus regulated by the availability of alternative rulers, and the costs that those rulers face in providing services. Individuals in a competitive governance market will thus pay a price for services determined very close to the costs of the competing states in providing those services, with the more efficient polities overing the most competitive prices. Individuals in noncompetitive markets, however, still pay a monopoly price, often well above the cost of providing services. The costs of providing governance for each polity varies spatially. Each polity possesses a zone, often (though not always) the zone around the capital, where its ability to extract resources and apply coercive force is very high. The farther away from this zone the state attempts to expand, the longer communications become,

15 the farther armies have to travel, and the more unfamiliar local society becomes to officials. All of these raise the costs of providing governance. Note that the increase of cost with distance is not necessarily linear. As James Scott (2014) has pointed out, topography can have a crucial importance for the spread of state administra- tion, with states finding flat settled areas easy to administer but having a hard time administering highland areas. By itself, this variation in costs will not affect the taxes charged to citizens, though it may lead to polities refusing to conquer areas they could not administer profitably, as the Roman Empire did at times.However, as we move from the center of one state, we may be moving towards the center of gravity of another. This will have an effect on taxes, since it gives local elites an outside option. By threatening, even if only implicitly, to switch their allegiance to a rival polity, border residents can extract concessions, usually in the form of lower net taxes, increased services, or increased local autonomy. Put in economic terms, the appearance of cooperation in the governance market is accompanied by lower prices and higher levels of services. The desire to eliminate these unstable, unprofitable border zones has been the main factor in the creation and stability of the state system. The state system, at its basis, is a product of cooperation by rulers against their citizens, where polities divide the potential market among themselves, and agree to not provided governance outside of these boundaries. Since each “state” is now a local monopolist in the provision of governance, individuals must pay them the monopoly price, leading to tax burdens being equalized across core and peripheral areas. This state system, thus constituted, resembles a cartel. In the same way that Archer Daniels Midland and its Japanese and Korean competitors distributed among themselves the global market in lysine in the 1990s, or Osram, General Electric, Associated Electrical Industries, and Philips divided global market in lightbulbs in the 1920s, contemporary states divide among themselves the right to tax the world. By limiting competition, the members of the cartel can charge citizens in border areas much higher prices than they would be able to otherwise. However, unlike most modern cartels the state system is, due to the anarchic nature of the international order, untroubled by the legal restrictions on cartels that exist in most countries. Like most modern cartels, the state system is haunted by the specter of cheating: That one player will attempt to steal the market share of the others, either by force or by attracting border elites. The territorial division that is characteristic of the contemporary state system is a means for reducing this type of cheating. Violations of the norm of non-competition are easier to police when they are unambiguous and visible. The mutually agreed, demarcated territorial border serves as an unambiguous way of dividing political authority, and of the territory of one taxing monopoly from one another. While a Medieval “border violation” might be difficult to separate from the legitimate exercise of political authority, today any state that governs outside of its internationally

16 recognized borders is clearly violating the norms of the state system. Within these borders, a single political unit is legally supreme—or, to use the com- monly used expression, “sovereign.” It recognizes other political units as sovereign within their own borders, and receives their recognition in return: In both theory and in practice, it is this mutual recognition, symbolized by the exchange of ambas- sadors that sets “states” apart from other political units. This does not mean that states are able to govern with equal efficiency. In fact, some states, such as those in contemporary Africa may be so institutionally underdeveloped that they are unable to provide much in the way of state services, or extract much in way of taxes. While these efficiency problems might doom these states in a perfectly competitive system, the state system guarantees them a share of the market, much as economic cartels can guarantee the survival of inefficient producers. Cooperation between states can be made self-enforcing with the help of strategies that punish deviating rulers for violations of the cooperative norm. While a state might gain revenues by collecting taxes from its neighbors’ subjects, this would lead eventually to a loss of revenue as it reduced taxes in the face of competition for the allegiance of its own border subjects. However, it may still be in states’ interests to alter the border in their favor. To reduce such attempts, the state system has developed a complicated system of norms that discourage the unilateral initiation of conflict, and unilateral annexation of territory. In Africa, for instance, colonial boundaries, however artificial, are widely considered to be inviolable. The losers from the creation of the state system are thus the elites of border areas. Now unable to play one side against the other, they have seen their legal privileges and favorable fiscal arrangements whittled away, and replaced by the same tax rates and political arrangements found elsewhere. Our theory has affinities with the existing literatures in international relations, some of which we discussed above. One is the large set work debating whether whether the formation of the state system did or did not coincide with intellectual or cartographical shifts in the way that states were represented, shift possibly associated with the treaty of Westphalia.8 While there is no doubt that some ideological change did take place, we offer an explanation for its economic foundations. We build on a large literature on the structure of the existing international system and the mechanics of border disputes.9 But we advance this literature by examining the origins of the system that they take for granted. A final influence is the large literature on state-building, which focuses on factors such as war and differences in institutional effectiveness.10 However, unlike this literature, we focus not on the origins of states but on the state system: not on why political units have become large or are efficient, but on why they have chosen to cooperate with each other. How does our theory help explain the puzzle of discontinuous political changes at borders? The residents of Neche, cannot buy government service in Gretna because the governments of the United States and Canada have mutually agreed that they

17 cannot. This means that both governments can provide the levels of taxes and services that they see ﬁt, unconstrained by potential competitors. This is the argument that we lay out and develop in this book. We explore the many consequences of viewing the territorial state system through this economic lens. What supports its stability? How does it respond to technological changes, and changes in norms that go against it? How have political and economic developments like the advent of democracy, the rise of globalization, etc., threatened or supported it? These are the questions we explore in the subsequent chapters.

1.5 The Plan of this Book

Chapter 1 of this book lays out the questions that are to be answered, and summarizes the theory of how and why the modern state system developed, and how and why it has remained stable over time. Its also briefly describes the existing literature, and the inadequacy of the answers that the literature has given to the questions that are the focus of this project. Chapter 2 sets out the central claims of the theory. It describes the market for governance, the losses rulers suffer from competing in this marketplace, and the potential benefits to forming a cartel. It explains the transition from a system without cooperation to one with cooperation, in which the key changing variables are the rising value of governance and the declining costs of governing distant territories. To demonstrate how these dynamics work, it examines in detail two cases. In late medieval Britain, the English and Scottish governments were able to cooperate to de- limitate a border, eliminate conflicting claims to sovereignty, and agree on procedures for dispute resolution. This enabled both sides to eliminate the power of previously privileged elite groups in the border region, and assimilate them to the administrative structure of the kingdom as a whole. On the Afghan-Pakistani border, by contrast, both governments have granted numerous concessions to people in the border regions, which have become an under-governed zone much like the medieval Scottish border. However, unlike the English and Scots, the two states have not been able to limit their ambitions to control territory on the other side of the formal frontier, leaving both sides unable to resist the demands of local elites for subsidies and autonomy. Chapter 3 examines how bilateral arrangements like those of the Anglo-Scottish border gave way to a hegemonic set of norms that influence the whole world. It discusses the emergence of multilateral cooperative arrangements in Europe, and the emergence and importance of international institutions in sustaining the state system. It also discusses how the state system has encouraged the persistence of states that govern areas that would otherwise be difficult to administer, and discouraged the entry of new states into the system. Chapter 4 discusses why the state system has been so robust, and the threat posed

18 to the system by international conﬂict. It discusses the role of nationalism in reifying international boundaries. It also discusses the gradual decline of border disputes and territorial wars, and discusses some recent exceptions to this trend. Chapter 5 addresses the incentives and mechanics that explain the historical origins of the state system. It provides evidence for how the empirical patterns pre- dicted by the the cartel theory emerged in Late Medieval and Early Modern Europe. It shows how universal claims to sovereignty declined at the same time that precise cartographic descriptions of borders increased. It provides evidence for the fact that the emergence of the state system was associated with increased taxation in border areas, and the equalization of the tax burden between those areas and those that were uncontested. It discusses the formal elements of international relations that became important in this period, particularly the exchange of diplomats and the development of ideas of international law, and how they enhanced the stability of the system. It also discusses how the state system spread outside of Europe during the period of Western imperialism. Chapter 6 lays out some ideas for how the state system may develop in the future. The modern state system developed in a period where no nation was democratic, and the long distance movement of both people and goods was far less common than in today’s globalized world. All of these developments threaten the ability of the state to remain sovereign in the classical sense, as does the rise of “regional superstates” such as the European Union. In some sense, the most important question of the 21st century is not how territory can be divided within the cartel of states, but whether such a cartel can survive into the future.

19 Notes

1See Fairbank and Chen (1968) and Ho (2002, 215). 2According to Osiander (2001) the list of scholars who support this view includes David Boucher, Seyom Brown, Hedley Bull, Kal Holsti, Hans Morgenthau and Mark Zacher, among many others. 3See also De Carvalho et al. (2011). 4For a classic discussion of the difficulty of studying the international system as a whole, see (Singer, 1961). 5This logic has some affinities to the large literature on nuclear deterrence, though the costs or war are usually not as high as in this case. It might also explain why democratic, well institutionalized states are less likely to initiate conflicts with other states, and virtually never initiate conflicts with each other (Maoz and Russett, 1993). 6This was in part a product of larger size of states, but even more closely related to their superior ability to prevent free riding and create homogenous internal markets (Spruyt, 1996, 158-67). 7Note that Spruyt does not present an argument for the ideological incompatibility with or institutional inferiority of empires relative to sovereign states, though he does discuss the particular problems of Medieval European examples. 8See Ruggie (1993), Philpott (2001), and Nexon (2009) for arguments in the affirmative and Krasner (1993) for a counterpoint. 9See, for example, Fearon (1995), Waltz (2001), Walt (1990), Wendt (1987), Ruggie (1993), Schultz (2013), Carter and Goemans (2011), Abramson and Carter (2016), Wagner (2010), and many others. 10See, for example, Tilly (1992), Bean (1973), Centeno (2002), Scheve and Stasavage (2016), Abramson (2017), Acharya and Lee (Forthcoming), Anderson (1979), Weber (2015), Brewer (1990), Dincecco (2011), Downing (1993), Ertman (1997), Spruyt (1996), and many others.

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