State Capacity as Spurious Correlation

I spent the weekend discussing work on state capacity with a group of scholars and academics. Most of the discussion focused on what state capacity is supposed to mean. Different readings offer different definitions. And on some occasions, papers that define state capacity in one way later proceed to mean something else.

The best we could do is to define state capacity as “the capacity to do x whatever you want x to be.” The circularity (state capacity is the capacity to …) is not accidental. Geloso and Salter (2019) are on to something when they define state capacity as a PPF, or a technical frontier, of the government. But there is no economic efficiency; what matters is being on any point of this PPF. State capacity can mean more “capacity” to provide public education or less public education through a voucher program. State capacity can mean building a wall on the border with Mexico or implementing a pro-immigration reform. Pick your x.

Because of this ambiguous definition, the introduction of a definition of “state capacity” is followed by an endless list of ifs and conditionals. There is something wrong if a lengthy list of considerations follows a definition of state capacity—time to go back to the drawing board.

Another issue is to (1) argue that state capacity leads to economic development and (2) measure state capacity as tax revenues, which depend on economic development.

Bryan Caplan summarizes many of my concerns with “state capacity.” Yet, this literature seems to fall into a labyrinth of spurious correlations.

What the literature is doing (at least the one I’ve seen) is offering a narrative that looks first at wealthy economies and second asks whether they have state capacity. Of course, the answer is yes, and the conclusion is that state capacity is (somehow) an explanation of economic development. Different would be to first look at high-state capacity and second ask if these are developed economies. Now the answer is no. North Korea, Cuba, and the Soviet Union are examples of states with the capacity to do x with underdeveloped economies. State capacity does not distinguish between a constitutional democracy with high economic freedom or an authoritarian government with low economic freedom.

The first strategy, looking at developed economies first and second at the level of state capacity, leads to what I here call a problem of spurious correlation. It is a selection bias problem.