The Political Economy of Indian
TERRY L. ANDERSON and
FRED S. MCCHESNEY
Most Americans today view the story of Indian-white
relations through a late-19th-century lens.
From this perspective, whites were intruders using
military strength to take Indian lands and leaving the
defeated Indians with nothing but useless tracts
known today as reservations.
An historian characterizes the conventional tale as
one long episode of 'massacre,' 'extermination,' and
'annihilation,' both 'utter' and 'complete,' recounted
"with overtones of racism, genocide, and other
Relative Peace Until 1850
This version of Indian-white relations, however,
misses the fact that the period from the first contact
between the two groups until about 1850 was one of
relative peace and harmony.
The first Pilgrim Thanksgiving illustrates the peaceful and
mutually beneficial relations between the two groups.
Even on the western frontier, fur traders were hardly in a
position to take from the Indians, and both sides partook of
the gains from trade.
Thus, the story of Indian-white relations is more
accurately seen as a gradual deterioration from
peaceful to bellicose.
A Change in Attitude?
This deterioration has been attributed to changes in
whites' ideologies or attitudes toward Indian property
17th-century Europeans supposedly believed that their
land claims were "unjustified and illegal if the prior right
of the Indian were not recognized. Full title was in the
Indian . . . from whom alone a valid title could be
But by the end of the 19th century the prevailing attitude had
allegedly become that of Teddy Roosevelt: "The settler and
pioneer have at bottom had justice on their side; this great
continent could not have been kept as nothing but a game
preserve for squalid savages" (1889, 90).
Changes in Attitudes
Economists do not like to resort to a change in
ideologies or attitudes to explain economic
phenomena, because changes in ideologies or
attitudes cannot be observed in the same way that
changes in income, relative prices, or technologies
It is possible to use changes in ideologies or
attitudes to explain anything, meaning that such an
explanation can never be falsified.
An Alternative Explanation
A&M offer a public choice explanation for the
deterioration in Indian-white relations during the 19th
Contrasting "the way of Coase with the way of
In the Coasian world, "people will never pass up an
opportunity to cooperate by means of mutually
But according to Machiavelli, "It is not gold, but good
soldiers that ensure success . . . for it is impossible
that good soldiers should not be able to procure
Cooperate or Not?
Hirshleifer offers two propositions:
(1) "Cooperation, with a few obvious
exceptions, occurs only in the shadow of
(2) "when people cooperate, it is generally a
conspiracy for aggression against others (or
at least, is a response to such aggression)"
Shadow of Conflict
This shadow also falls over Indian-white relations.
In resolving conflicts over land claims, both sides
had a choice.
They could follow the Coasian way and peacefully
exchange, thereby enhancing total welfare, or they
could follow the Machiavellian way and fight, imposing
deadweight welfare losses overall.
That they switched from the former to the latter
suggests a deterioration in the gains from trade
relative to the net gains from warfare.
An Economic Model of Negotiation
John Umbeck's (1981) article on the choice
between contract and violence provides a
useful starting point.
According to his theory, no distribution of
rights is stable if anyone has less than he can
obtain by forcefully taking from others.
This did not mean violence, however, …
This conclusion is not surprising in light of
Identical production functions meant that no one
had a differential incentive to put more effort into
Equal abilities to use force meant that neither party
had a greater likelihood of winning the fight.
And finally, in a world of zero (or relatively low)
negotiation costs, gains from trade could be
captured without cost, thus avoiding the negative-
sum game of war.
Once these assumptions are relaxed, however,
Machiavellian outcomes can occur, as in the
case of litigation.
Cooter and Rubinfeld (1989) summarize the
nature of the decision to litigate disputes by
considering three stages of a legal dispute:
assertion of a legal claim, and then
either bargaining (and maybe settlement) or
litigation (when no settlement is reached).
Settle or Litigate; Negotiate or Fight
Analytically, these phases apply to
choices made between trade and war.
Each phase has its analogue in the
history of Indian-white relations.
To initiate the possibility of exchange, Indians would
have to assert credible claims to what Europeans
Assertion of Claims
Once whites had trespassed upon Indian territory, two
factors would determine whether Indians asserted claims
to the disputed resources.
First, asserting a claim depends on the expected loss
from a continuing trespass relative to the cost of
asserting the claim.
Second, asserting a claim requires a credible ability to
Given the vast amount of land held by Indians on
first contact with Europeans and the relatively small
amount initially desired by Europeans, it would be
surprising for Indians to assert any claim against
trespass at first.
As the century progressed, however, and the
relative mass of land held and demanded by the two
sides shifted, it would be more likely for Indians to
defend against trespass as a prelude to either treaty
Negotiating or Fighting
Once harm is imposed and a credible claim asserted,
disputants must choose between bargaining or fighting.
Obviously Indians and whites did not place equal values
on the lands in dispute.
On the Plains, where buffalo roamed over vast areas,
Indians valued their hunting territories.
In this setting the marginal value of an acre of land
was quite low.
On the other hand, whites generally were interested in
more intensive agriculture, making their marginal value
Implies more controversy over control of specific
parcels of land and a differential willingness on both
sides either to negotiate or fight over the land.
2. Fighting Endowments
Umbeck assumed that each individual had equal
fighting abilities and that each could only use his
personal endowment of human capital.
Both of these assumptions are unrealistic in the
case of Indian-white relations.
Military technologies differed: Indians relied
extensively on bows and arrows, whereas whites
primarily used guns.
Treaties are not Contracts
Following Hirshleifer's second proposition, unlike
disputes between individuals, warfare between groups of
people requires collective action.
Consequently the analogy between contracts to settle
litigation and treaties to avoid warfare breaks down.
Individuals make settlement contracts or litigate on
their own behalf; war is waged on behalf of entire
groups in a public choice setting, and treaties are
made by subsets of representatives from each group.
A settlement contract must make all individuals better
off, whereas litigation leaves them worse off; the same
is not necessarily true of treaties and warfare.
One difference between individual contracting and
collective treaty making is that treaties often create a
prisoner's dilemma; that is, even if the total benefits from
a treaty exceed its total costs for both sides, any
particular individual may find it in his interest to violate
the treaty terms.
The individuals within the collectivities [to be bound by
a treaty] may or may not have given their consent to
arrangements entered into by their governments and
may or may not benefit from the treaty provisions....
(Roback, 1992, 7)
This prisoner's dilemma problem associated with treaty
enforcement reduces the likelihood of negotiated
outcomes and increases the likelihood of war.
Similarly, coalition costs can affect the decision to
negotiate or fight in a collective setting.
Coalition costs are typically unimportant in the
individual contractual setting.
But because war ordinarily is not undertaken by
individuals or small groups, the calculus must
include the cost of amassing military forces.
Low Coalition Costs on the Margin
Whites used two principal arrangements to
part-time militia made up of local citizens and
the standing national army of full-time
Use of a full-time, professional army raises
the fixed costs but lowers the marginal costs
of warfare and so increases its likelihood.
Problems of Collective Decisions
Finally, attempts to predict peace or war must recognize
that these decisions are made by government officials (in
the case of whites) and tribal leaders (for Indians).
Just as dispute resolution by judicial trial is a "negative-
sum game for the disputants, grafted onto collective
choice by an impartial court," war is a negative-sum
Rational avoidance of negative-sum situations presumes
that the persons deciding between negotiation
(settlement) and violence (litigation) bear the relevant
Where political decisions are made, however,
individuals or coalitions can benefit themselves by
shifting the costs of war to others, meaning that the
relevant political actors may undervalue the cost of
Although warfare is negative sum overall, it may be
value enhancing for influential persons or groups.
If so, raiding will become more common relative to
trading--for political reasons.
If a small group can call on a standing army
composed mostly of outsiders and compensated
from general tax receipts, then the congruence
between gains and costs is lost.
The incentive increases for "political" wars, whereby
wealth is created for one group at the expense of
A standing army creates a class of professional soldiers
whose personal welfare increases with warfare, even if
fighting is a negative-sum act for the population as a
For military bureaucrats (typically the highest-ranking
soldiers), warfare increases budgets.
War means potential distinction for soldiers in the field,
more promotions, and simply relief from boredom.
Particularly when the army has political influence, a full-
time fighting force will increase the number of disputes
3. Information Costs
Information costs are crucial in the warfare
calculus but are ignored by Umbeck because he
assumes that everyone has an equal ability to
use force and that each knows how much force
the other will use.
In this world, outcomes are known so there is no
reason to expend resources in wasteful warfare.
Uncertainty, however, is a major factor in
warfare, especially if it produces differential
expectations about outcomes.
Because, ceteris paribus, the potential for
differential expectations decreases with repeat
dealings, we would expect warfare to
predominate over negotiation when parties are
unfamiliar with one another.
This explains high rates of settlement versus
litigation (where there is generally good
information about precedent) where "ten
disputes settle out of court for every one that is
At least among judiciable disputes, negotiation is
the rule; fighting is the exception.
4. Negotiation Costs
Even with differential information and therefore
different probabilities assigned to winning and
losing a war, the likelihood of fighting is a positive
function of negotiation costs.
These include the cost of defining and
enforcing property rights.
As property rights become less clear and other
transaction costs rise, the costs of negotiation will
grow relative to the cost of fighting, and violence
will become a more attractive alternative.
In Indian-white negotiations, several
transaction costs are potentially important.
High Transaction Costs
1. The most obvious obstacles to negotiation over
resources are differences in language and customs
between Indians and whites.
Chiefs who signed treaties did not always understand what
they had agreed to.
2. Also important would be the nature of property
rights held by Indians relative to those desired by
Whites might earnestly seek to negotiate for peaceful
acquisition of resources. But purchasing rights requires that
someone be able to sell them.
High Transaction Costs (cont’d)
These problems would be further complicated
by restrictions on alienability.
Even Indian tribes with well-specified property
rights among themselves often had restrictions on
Political Economy Model of Warfare:
1. Zone of Controversy
2. Informational Asymmetry
3. Military Technology
4. Property Rights
5. Standing Army Versus Militia
Zone of Controversy
Disputes over resources predictably will not occur at
the first point of contact between whites and Indians.
Nor will disputes continue to the point where all
resources are owned by one group or the other.
Decisions to rely on negative-sum solutions to
disputes can be traced to some "contract failure" in
the negotiation process.
Zone of Controversy (cont’d)
Indians at first were prepared to accede to whites'
assertion of land claims.
As Robert Utley describes conditions on the Great
Plains until about the time of the Mexican War, it
was not worthwhile for the Indians to stop white
intrusions, although whites' behavior was
"sometimes reprehensible. . . . Neither race posed
much of a threat to the other, and on the whole they
got along fairly well" (1967, 59).
Zone of Controversy (cont’d)
The hypothesis that negotiations would have
predominated over warfare in the early years of
Indian-white relations can be tested with the data on
the number of battles and treaties between Indians
and whites shown in Table 8.1.
Until 1830 fighting was comparatively rare and
treaties frequent, but the use of violence to settle
disputes was increasing throughout the 19th
Ultimately warfare became the principal way of
resolving controversy, and in fact Congress voted in
1871 not to ratify any more Indian treaties.
This shift from negotiation to warfare can be
explained, in part, by informational
asymmetries that arose increasingly as
interaction moved onto the Great Plains.
Since western Indians were more nomadic, it
was more difficult for whites to communicate
with the disparate bands, let alone the entire
Unfamiliar with Tactics
In fact, one side's faulty information seems to have
been an important factor in just about all the bloody
fighting in the West.
The Plains Indians "greatly favored the decoy tactic"
(Utley 1984, 105), sending forth a small party to
encounter a white detachment (seemingly by
mistake) and then running from it to lure pursuing
whites into a trap where many more Indian warriors
Thus in the notorious Fetterman Massacre in 1866,
eighty-one bluecoats were enticed into combat with
some 2,000 Sioux and wiped out.
More disputes will degenerate into violence,
ceteris paribus, if the two sides have
differential expectations about likely
outcomes of fighting.
Different expectations may be due to
differences in information.
A likely source of information asymmetry is
the development of new weapons by one
New weapons may cause hostilities if the
other side is not well-informed about their
Superior military technology is often alleged to be a
major factor in white domination of Indians.
However, although Indian and white war
technologies were often different, it is not obvious
that one side or the other had systematically better
In the early years, Indians' bows and arrows were a
match for whites' muskets.
Indians usually were able to obtain new weapons
(from both private traders and even the reservation
agents of the Bureau of Indian Affairs) almost as
soon as they were available to whites.
Moreover, as Custer's troops discovered, white
technology was not always superior and certainly
was not enough to guarantee success against large
General William Tecumseh Sherman stated that "fifty
Indians could checkmate three thousand troops" (quoted in
Debo 1989, 221).
The real issue, however, was not whether whites
had superior technology but whether Indians
might sometimes have been unduly optimistic
about winning when information about new
weapons was unavailable.
For example, in the case of the Wagon Box Fight in
1867, Sioux losses were extraordinarily heavy.
"One chief placed them at 1,137, and called the
battle a 'medicine fight'—meaning that the
soldiers had had supernatural help.
What the soldiers had were new Springfield
breech-loading rifles and plenty of ammunition,
while the Indians were using the old muzzle-
loaders" (Chapel 1961,259).
For trade to occur, property rights must be well-
specified and divestible, and agreements must be
Agricultural tribes had property rights specified in
ways that made negotiation less costly.
Conversely, nomadic tribes relied more on the rule
of capture, with land rights specified over large
East vs. West
East of the Mississippi, where agriculture was the
principal commercial activity, private property was well
The costs of negotiated exchange decline when one
party has well-defined, divestible property rights in the
resources demanded by another.
For the nomadic tribes in the West, land and the
resources on it were a vast commons, with only
usufructuary rights by possession recognized.
When whites discovered that Indians did not have
exclusive control and could not transfer land, they had
little alternative but to raid.
One would predict, therefore, that whites desiring
resources used by western nomadic tribes would
simply take them more often than they would take
resources owned by eastern agricultural tribes.
The model is also applicable to Indians' fighting
In the West, white migration did not intrude on a
stable system of aboriginal rights recognized by
Indians themselves "but rather broke over a
congeries of scattered groups that had been fighting
one another for generations and would continue to
fight one another to the day of their final conquest
by the whites."
Tribe vs. Tribe
A principal source of the continuous warfare among
Indian tribes was the fact that major hunting grounds
The belief that white migration generally dislodged
Indians from centuries-old ancestral lands is inaccurate.
The horse and the gun had arrived in the West well
before major white incursions and had greatly altered
the configuration of land use and possession among
As one Sioux chief declared to his white conquerors,
"You have split my land and I don't like it. These lands
once belonged to the Kiowas and the Crows, but we
whipped these nations out of them, and in this we did
what the white men do when they want the lands of
Finally, much Indian-white violence can be
traced to agency costs that made negotiated
On the Indians' side, chiefs almost never
constrained individual warriors.
On the white side, similar problems abounded.
Treaties signed in good faith by white politicians
proved to be unenforceable, as individual whites
violated them with impunity.
Standing Army Versus Militia
A standing army lowers the incremental costs
of assembling fighting coalitions, decreasing
the marginal costs of war and shrinking the
surplus from negotiation.
The rise of a standing army also creates
political incentives that increase the likelihood
of fighting to resolve disputes.
Low Marginal Costs
Maintaining a standing army, as opposed to
raising a militia, predictably would increase
the number of battles, as noted above.
Once the fixed costs of raising troops is
incurred, the marginal cost of fighting is
relatively low, increasing the incentive to fight
rather than negotiate.
The “Indian Problem”
A standing army also meant full-time officers and, behind
them, military bureaucrats whose careers and budgets
were advanced by fighting.
This latter phenomenon was particularly important during
the 19th century.
Following both the Mexican and Civil Wars, the size of
the peacetime army had to shrink.
This was acceptable to most enlisted men, who were
But reduced troop strength was of considerable
concern to career officers.
The solution for postwar soldiers came principally from
the "Indian problem."
Civil War officers retained their brevet ranks
and pay as long as they were fighting
For enlisted men as well as officers, an
absence of war meant ennui and lost
chances for advancement.
The antidote was battle.
If having a standing army increases the
incentive to fight, one would expect the
number of Indian battles to have risen after
both the Mexican and the Civil Wars.
And that, in fact, happened.
For the period 1790 to 1900, Figure 8.1 shows the
size of the army and number of battles (in
A Big Standing Army
Because the standing army was so much smaller
during the Mexican War, the number of Indian
battles initially declined as troops were called to fight
in the Mexican War.
It was after the war, when troops were available in
great numbers, that there was an upsurge in fighting
In the case of the Civil War, the army grew so large
(in part as a result of the first military draft) that more
men were stationed on the frontier than before.
The increase in the number of battles is even more
dramatic after the war, however, as the army's
attention shifted westward.
During the first half of the 19th century the two
cultures struck a balance wherein negotiation
predominated over warfare.
But on the Plains, Indian nations were at war with
The arrival of the horse from the south gave the
Apache and Comanche first access to the new
form of transportation and superior military
Until the other tribes recognized the superiority that
the horse afforded its owners or until they got their
own horses, there was little peace.
Because the horse also turned sedentary tribes
into nomads pursuing buffalo, conflict between
Indian nations not unlike that between Indians and
whites (after 1850) was inevitable.