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Under anarchy, uncoordinated competitive theft by “roving bandits” destroys the incentive to invest and produce, leaving little for either the population or the bandits. Both can be better off if a bandit sets himself up as a dictator—a “stationary bandit” who monopolizes and rationalizes theft in the form of taxes. A secure autocrat has an encompassing interest in his domain that leads him to provide a peaceful order and other public goods that increase productivity. Whenever an autocrat expects a brief tenure, it pays him to confiscate those assets whose tax yield over his tenure is less than their total value. This incentive plus the inherent uncertainty of succession in dictatorships imply that autocracies will rarely have good economic performance for more than a generation. The conditions necessary for a lasting democracy are the same necessary for the security of property and contract rights that generates economic growth.

PREFACEThis Memorandum Fresents a new theoretical model of military alliances and other international organizations.The model, if correct, has important policy implications, but these implications are discussed only briefly here. Hopefully this presentation will stimulate further study of the model's application to specific policy problems.

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Part of a series of writings that began with the author's essay on ‘Autocracy, Democracy, and Prosperity’, published in 1991. It puts forth, in an intuitive and non‐technical way, a part of the theory that is set out with formal proofs and crucial additional results in McGuire and Olson's ‘Economics of Autocracy and Majority Rule’. It analyses the kings or dictators who control autocratic governments—and the oligarchies or majorities or other ruling interests that control other types of government—in just the way that economists analyse the behaviour of firms, consumers, and workers. That is, it takes a broader approach to economics by applying the familiar assumption of rational self‐interest to the autocrats or other ruling interests that control a government, and then finds what types of policy will best serve the ruling interest.

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We present and test empirically a new theory of property and contract rights. Any incentive an autocrat has to respect such rights comes from his interest in future tax collections and national income and increases with his planning horizon. We find a compelling empirical relationship between property and contract rights and an autocrat's time in power. In lasting --but not in new --democracies, the same rule of law and individual rights that ensure continued free elections entail extensive property and contract rights. We show that the age of a democratic system is strongly correlated with property and contract rights. JEL O00, 010 3

The idea is advanced that it is the rationality of individuals in societies that makes them achieve their production potential rather than their per capita productive resources, and that the low‐income countries of the Second and Third Worlds are poor mainly because they are much further below their potential incomes than are rich countries. If these countries were to improve their governance and institutions sufficiently, there would be huge gains from foreign investment and advanced technologies, which are for the most part, available at relatively modest cost to poor countries. The evidence for this view is taken from studies of the borders of countries and the flows of labour (migration) and capital that cross them, and data on per capita income in relation to population density.