Many of the most pernicious economic institutions and policies create entry barriers or manipulate factor prices to transfer resources from entrepreneurs and workers to groups that hold political power. These inefficiencies partly result from the fact that direct and efficient fiscal instruments that can be used for taxation and redistribution of resources are absent. One might then conclude that increasing state capacity and expanding the set of available fiscal instruments should improve the allocation of resources by preventing the use of these inefficient, indirect methods of redistribution. This reasoning ignores the effect of greater state capacity and the change in the set of available fiscal instruments on the political equilibrium, however. Because the availability of more efficient means of taxation increases the potential benefits of controlling state power, it also intensifies costly political conflict aimed at capturing the control of the state. This indirect effect counteracts the benefits from more efficient taxation and may dominate the direct benefits. The paper establishes the possibility that the allocation of resources may deteriorate substantially in response to an autonomous increase in state capacity and the set of fiscal instruments. It also argues that in the British case, which is a key historical example that points to the central role of increased state capacity in economic development, this change was not autonomous; instead, it was an equilibrium response to changes in political institutions that placed better checks on the exercise of power by the executive. This reasoning suggests that the study of the effect of fiscal capacity and the evaluation of policies aimed at increasing state capacity in less-developed economies should be done in the context of dynamic models of political economy, in which fiscal capacity and political constraints are jointly determined.

This paper studies whether labor scarcity encourages technological advances, that is, technology adoption or innovation, for example, as claimed by Habakkuk in the context of nineteenth-century United States. I define technology as strongly labor saving if technological advances reduce the marginal product of labor and as strongly labor complementary if they increase it. I show that labor scarcity encourages technological advances if technology is strongly labor saving and will discourage them if technology is strongly labor complementary. I also show that technology can be strongly labor saving in plausible environments but not in many canonical macroeconomic models.

We live in an unprecedented age of globalization, where technology, ideas, factors of production, and goods are increasingly mobile across national boundaries. The current wave of globalization is distinguished from previous ones in part because of the major role of infor mation technology. Nevertheless, globalization is not irreversible. Openness to international trade, finance, and technology is a choice that countries make, and despite the facilitating role of information technology, many countries, even many leading players in the world econ omy including the United States, China, India, Brazil, and Russia, could decide to close their borders. A major cause of the end of the previ ous (also historically unprecedented ) nineteenth century wave of globalization was disillusion ment with the international economic order, in