Introduction

Our purpose is to assess whether the economic size of the public sector is too small or too big to promote economic growth, first in general for all countries in the world and then for political regimes dichotomized as democracies and dictatorships. Even if many believe that, as Rodrik (1992, p. 331) puts it, “it is the quality of intervention that matters, not its quantity,” we show that mere quantity does have consequences. Our econometric analysis extends and modifies that of Ram (1986), but we also seek to place the econometric analysis in a broader theoretical context.

Section 2 is an introduction to the perennial discussion of the relation between the state and the market. Section 3 summarizes alternative ways of thinking about the economic role of government. Section 4 sets up the econometric analysis, the results of which are presented in Section 5. Finally, Section 6 examines the impact of regimes.

The state and the market

Capitalism is a system in which most productive resources are owned privately. Yet under capitalism, property is institutionally distinct from political authority. As a result, there are two mechanisms by which resources can be allocated to uses and distributed among households: the market and the state. The market is a mechanism in which scarce resources are allocated by their owners: Individuals cast votes for allocations with the resources they own and these resources happen to be always distributed unequally. The state is also a system that allocates resources, including those it does not own, with rights distributed differently from the market.