In recent times, the question of who controls a group of people has almost always been a political question. Yoe u may heard of groups controlled by capitalists. Groups controlled by labor. Groups controlled by religious fundamentalists. You may have also heard of groups controlled by occupational body, such as lawyers or bankers or doctors. And you have certainly heard of groups controlled by political parties, by Democrats, Conservatives, Christian Democrats, Liberals, Radicals, Republicans, and Socialists.

You probably have not heard much about a government controlled by its customers. Thinking about government as an economic unit that sells some good helps us analyze government in economic rather than political terms. The economic historian Fredric C. Lane laid out this foundation which indicated that the government provided protection. This lense allows us to generalize our understanding of government to the level of other economic units that sell goods (e.g., banks, corporations, and the like). In this view, there are three basic alternatives that drive control, each of which entails a fundamentally different set of incentives.

Control by a proprietor

This form of control was more common among the lords of the Middle Ages. As scope grows, control by a single proprietor is very rare. For example, the Sultan of Brunai or the founder-CEO of some company acts like a proprietorship.

Governments controlled by proprietors have strong incentives to reduce the cost of providing protection or monopolizing violence in a given area. But so long as their rule is secure, they can have little incentive to reduce the price (tax) they charge their customer below the rate that optimizes revenue. The higher the price, the lower the actual cost, the greater the profit.

The ideal fiscal policy for a government controlled by its proprietors would be a huge surplus. When proprietor can keep their revenues high but cut their costs, this has a large impact on the use of resources. Labor and other valuable inputs that would otherwise be wasted providing unnecessarily expensive protection become available instead for investment and other purposes. The higher the monarch can raise his profit by lowering costs, the more resources are freed. When these resources are used for investment, they provide a stimulus for growth. But even if they are used for conspicuous consumption, they help create and feed new markets that otherwise would not exist if the resources had been wasted to produce inefficient “protection.”

Control by employees

Employee-run organizations tend to favor any policy that increases employment and oppose measures which reduce jobs. As Lane put it, “When employees as a whole controlled, they had little interest in minimizing the amounts exacted for protection and none in minimizing that large part of costs represented by labor costs, by their own salaries. Maximizing size was more to their taste also.”

A government controlled by its employees would seldom have incentives to either reduce the costs of government or the price charged to their customers. However, where conditions impose strong price resistance, in the form of opposition to higher taxes, governments controlled by employees would be more likely to let their revenues fall below their outlays than to cut their outlays. In other words, their incentives imply that they may be inclined toward chronic deficits, as governments controlled by proprietors would not be.

Control by customers

Lane was inspired to analyze the control of government in economic terms by the example of the medieval merchant republics, like Venice. There a group of wholesale merchants who required protection effectively controlled the government for centuries. They were genuinely customers for the protection service government provided, not proprietors. They paid for the service. They did not seek to profit from their control of government’s monopoly of violence. If some did, they were prevented from doing so by the other customers for long periods of time. Other examples of governments controlled by their customers include democracies and republics with limited franchise, such as the ancient democracies, or the American republic in its founding period. At that time, only those who paid for the government, about 10 percent of the population, were allowed to vote.

Governments controlled by their customers, like those of proprietors, have incentives to reduce their operating costs as far as possible. But unlike governments controlled by either proprietors or employees, governments actually controlled by their customers have incentives to hold down the prices they charge. Where customers rule, governments are lean and generally unobtrusive, with low operating costs, minimal employment, and low taxes. A government controlled by its customers sets tax rates not to optimize the amount the government can collect but rather to optimize the amount that the customers can retain. Like typical enterprises in competitive markets, even a monopoly controlled by its customers would be compelled to move toward efficiency. It would not be able to charge a price, in the form of taxes, that exceeded costs by more than a bare margin.