Governments are large or small depending on the level of trust and civic attitudes people have for one another. These attitudes shape peoples’ taste for redistribution and public ownership, and also affect the quality of governance. This position has been advanced by a large literature; most recently in this interesting paper put out by IZA.
Here’s a graph which gets at the central idea:
One key advance in this paper is isolating the non-linear nature of this relationship. Broadly, there are three clusters of countries here — Scandinavian countries (lots of government, high-trust, high-quality); Continental European countries (lots of government, low-trust, low-quality); and Anglo-Saxon countries (low levels of government, medium-trust, medium-quality).
One explanation of this result (provided in the paper) is the following: high levels of government spending can be sustained under two social equilibria. In the low-trust world; you have a chronic levels of mistrust and civic mindedness. Nevertheless, the fact that uncivic minded people benefit from public services, but evade paying taxes, encourages more spending. High levels of corruption and low levels of public trust make the government work poorly. Yet individuals remain attached to the state, as in societies marked with a marked in-group bias it may remain a treasured source of largess and security. Where everyone cheats, as in Greece, it makes sense to demand more for yourself and leave the bill for someone else.
On the other hand, you can also sustain a large and efficient welfare state when everyone is civic minded and people typically do not shirk. High levels of trust allow individuals to coordinate the public provisioning of social insurance. Individuals are less likely to free-ride. I also wonder about thinking about this in light of Amar Bhide’s book, which argues against robotic finance in favor of a more discretionary, case-by-case Hayekian approach. Well, bureaucrats can be trusted with discretionary power in high-trust societies, while they either become corrupt in low-trust societies, or else you have to resort to dumb regulatory rules.
Many Anglo-Saxon countries (and Japan) appear in the middle. They are not so full of shirkers demanding large public provisions; nor are they so trusting that they sustain a Nordic utopia. In the absence of higher levels of trust or pro-social attitudes, it seems plausible that a larger government in these countries would come up somewhere between Sweden and Italy in effectiveness.
It’s also interesting to examine social trust in developing countries, as Ajay Shah and Vijay Kelkar do here:
China comes out as a very high-trust society. One wonders whether its governance successes, if any, ought to be credited to the citizenry of China rather than the wonders of Chinese central planning.
Other countries come out looking much worse — the rest of the “BRICs” for instance, plus Turkey and South Africa. As Arnold Kling and Nick Schulz point out, these countries have built governments much larger as a percentage of their economy than countries like Britain or America had at a comparable level of development. And as their levels of trust suggest, these governments are not particularly effective. Many social democrats expect these countries to build large welfare states as they grow richer, and it will be interesting to see how countries so large and distrusting will handle the challenge. Of course, there is substantial variation here, trust can change over time, the correlations are loose, etc. America for example has a small government even taking its trust into consideration.
So how do countries generate a more cooperative citizenry? One suggestion comes from Garret Jones, economist extraordinaire, who argues that the best way to drive cooperation is to induce patience and perceptivity, which are in turn driven by higher IQs. Jones in fact suggests that one of the ways in which IQ drives growth is through exactly one of the channels by which IQ generates a large “social multiplier.” This multiplier refers to the observation that a two standard deviation increase in IQ increases a person’s wage by 30%; but increases a nation’s wage by 700%.