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The Independent Institute
Working Paper #48

The Ongoing Growth of Government in the Economically Advanced Countries


I maintain that in the economically advanced countries, government continues to grow, as it has grown for more than a century, although the growth now takes a somewhat different mix of forms than it did in earlier times. Some leading analysts, in contrast, have concluded that the growth of government has slowed or even stopped in the past twenty years. In this paper, I first show how those analysts have erred because of their excessive reliance on conventional measures of the size and growth of government. I then discuss the logic of the growth of government in the economically advanced countries. Finally, I contrast my own interpretation with the interpretation developed by Ludwig von Mises (and elaborated by Sanford Ikeda), which concludes that the mixed economy is inherently unstable and must transform itself into either laissez faire or complete socialism. In my own view, neither of these two extreme forms of politico-economic organization is now realizable, although the reasons for their unrealizability differ. As a feasible political economy, pure socialism is dead; so is laissez faire. In the real world of the near and intermediate terms—at least for the next several decades—the likely prospect is for moderate movements back and forth along the middle segment of the spectrum occupied by different degrees of mixed economy, some of them more severely hampered by government than others.

Misleading Measures of the Growth of Government

Many of us who believe that governments continue to grow relentlessly, at least in the economically advanced countries, have been criticized by analysts who claim that in fact the growth of government has petered out or slowed substantially. Those who advance such claims perceive us to be needlessly alarmed, and they fault us for a failure to acknowledge the decisive turn of events associated with the so-called Reagan and Thatcher revolutions of the 1980s. Not to worry, they exhort us; the statists are on the run, and a brave new world of market-oriented liberalism shimmers on the horizon (Boaz 2003).

I maintain that the seemingly level-headed realists are the ones who have failed to perceive correctly the ongoing growth of government.1 A major reason for their failure is their reliance on certain conventional measures of the size and growth of government. Some of these measures have a built-in tendency to exhibit deceleration even when a more compelling representation indicates continuing steady growth. In other cases, the conventional measures simply miss the growth of government that has been diverted into channels beyond the scope of their measurement. To some extent, governments have been growing in important but unmeasured or poorly measured ways all along, and they continue to grow in these ways, perhaps more menacingly than ever before. Off-budget spending, for example, is a well-known resort of political scoundrels, but it is only one example among many of how governments employ hard-to-measure means to achieve their usual ends, especially when tax resistance or formal spending limits frustrate their chronic desire to tax and spend at a greater rate.

Government’s Share of Gross Domestic Product

The most common measure of the size of government is the amount of government spending relative to gross domestic product (GDP). In Vito Tanzi and Ludger Schuknecht‘s recent (2000) monograph on the growth of government, for example, the authors present much of their data in the form of government-spending variables relative to GDP. A major theme of the book is: “Government spending [measured in this way] increased most rapidly until about 1980. Since the early 1980s, it has been growing more slowly and in some instances has even declined” (3).

Now, the first thing to notice is that a sure-fire way to make nearly any economic magnitude appear small is to divide it by GDP, because the latter, which purports to be the total value at market prices of all final goods and services produced within a country in a year, is always an enormous dollar (or euro or peso or other currency unit) amount. Government spending of $2,855,200,000,000, as in the United States in fiscal year 2001, seems to be an astronomical amount, but just divide it by the value of concurrent GDP and, voilà, it’s a mere 28 percent—surely nothing to be alarmed about, especially in comparison with corresponding figures for many European countries that exceed 50 percent.2

(It is worthwhile to notice in passing that GDP, a measure that includes a large component for capital consumption allowances [13.3 percent of the total in 2002 for the United States], makes an inherently ill-suited aggregate for use as a benchmark in assessing the size of government. Certainly, net national product [NNP] or national income [NI] would be a more defensible aggregate. The difference is not trivial. Thus, again for the United States in 2002, for example, the current receipts of all governments amounted to $2,875 billions, or 27.5 percent of GDP, 31.8 percent of NNP, 34.4 percent of NI.)3

The next thing to notice is that because government spending for currently produced final goods and services is itself a component of GDP, the ratio of the former to the latter is immediately compromised. Any addition to such government spending increases the denominator as well as the numerator of the ratio. Suppose that in year 1 the government spends $100 dollars for currently produced final goods and services, and the GDP in that year is $500. Now suppose that in year 2 the government spends twice as much—that is, it increases its purchase amount by 100 percent—but nothing else changes. In year 2, the government’s share of GDP will be 33.33 percent (or $200/$600), as compared to 20 percent in year 1. An analyst focusing on the government’s spending share then concludes that government has grown not by 100 percent, as it plainly has, by construction, but only by 66.66 percent (that is, [(33.33/20) - 1] • 100). The greater is the government’s initial share, the greater is the bias in moving from its absolute spending to the share concept to measure its growth. If government had begun with spending of $100 out of a GDP of $200, then doubled its purchase amount, other things being unchanged, it would have increased its spending share from 50 percent to 66.66 percent—a mere 33.33 percent growth.

Granted, many economically advanced countries have maintained a fairly steady government “exhaustive” share of GDP during the past couple decades (Vito and Tanzi 2000, 25), but this steadiness merely attests that the government’s purchases of currently produced final goods and services have grown fully as fast as the sum of nongovernmental purchases of such goods and services during that period of substantial economic expansion, not that the government has grown quiescent or stuck in the mud. In the United States, for example, the total government share of GDP was 22.1 percent in 1975 and 17.6 percent in 1999. Lest anyone think that the government ran out of steam during that quarter-century, however, one ought to notice that government increased its purchases of currently produced final goods and services from $361.1 billion in 1975 to $1,634.4 billion in 1999, which is to say, it increased the annual rate of such spending by $1,273.3 billion during that period (U.S. Council of Economic Advisers 2001, 274-75). To be sure, inflation accounts for some of that increase, but even in constant (1996) dollars, the increase was from $942.5 billion to $1,536.1 billion (ibid., 277), or 63 percent—hardly a retrenchment. Population growth cannot justify the increased spending: the U.S. population grew by just 26 percent during the period (ibid., 315).

Of course, most recently the really gigantic increases in government spending have taken the form of transfers (including subsidies), which are not components of GDP and therefore do not give rise to exactly the same numerator-denominator bias that arises when government increases its purchases of currently produced final goods and services (“exhaustive“ spending). Transfer spending also, however, is commonly placed for purposes of analysis in relation to GDP, which then serves as a sort of “normalizer” or standard of comparison, and whenever this ratio is used, some of the same problems identified earlier arise again. Even if one grants that some such benchmarking is appropriate, one still might ask why government’s transfer spending should be placed in a ratio to GDP, rather than, say, in a ratio to population or some other base. And if the ratio to GDP remains constant, one might ask why such constancy should prevail. That is, why should government’s transfer spending increase whenever the economy’s output of final goods and services increases? Indeed, such constancy would seem to betoken a kind of relative growth of government in its own right, inasmuch as people in a higher-income society presumably can get by more readily without government assistance, and hence the ratio of transfers to GDP might be expected as a rule to fall in a growing economy, rather than rising or even remaining constant.

However this matter might be viewed, in reality the ratio has risen enormously in all the economically advanced countries during the past several decades, and it now stands at more than 20 percent on average for a group of seventeen important industrial countries studied by Tanzi and Schuknecht, up from less than 10 percent as recently as 1960 (2000, 31).4 Increasingly, transfer spending is becoming recognized as the Godzilla that threatens to consume New York, Tokyo, Berlin, and nearly every other city on the planet. A few countries, such as Chile, have taken effective measures to deal with this looming threat to government fiscal viability, but so far most politicians in most countries have kept their heads planted firmly in the sand, ignoring everything beyond the next election, while the government’s transfer spending has grown ever more bloated and the severity of the adjustments that will have to be made when the day of reckoning can no longer be postponed has grown ever greater.

Government’s Share of Employment

Government employment as a percentage of total employment often has served as an index of the size of government. This measure, too, has a built-in bias toward suggesting that the rate at which government is growing is decelerating over time even when government increases its share of employment by, say, one percentage point every year. Thus, for example, when government’s employment share increases from 2 percent to 4 percent, the government grows by 100 percent, but when the share increases from 20 percent to 22 percent, gobbling up the same incremental proportion of total employment, the government grows by just 10 percent.

In the group of seventeen advanced countries analyzed recently by Tanzi and Schuknecht (2000, 26), the government’s average employment share increased from 5.2 percent in 1937 to 12.3 percent in 1960 to 18.4 percent in 1994. The rate of increase of this ratio has declined during the past couple decades in most countries, but one ought not to make too much of that deceleration. In the United States, increases in the amount of “contracting out” of government functions have led to a replacement of formal government employees by a growing “shadow army” of many millions of seemingly private employees—grantees, contractors, and consultants—who are doing what they are doing only because the government arranges it and pays for it to be done (Blumenthal 1979, Hanrahan 1983, Light 1999a, 1999b). According to Paul Light’s estimate’s, the U.S. federal workforce is not the fewer than 2 million persons officially reported (as of 1996) but nearly 17 million persons—“and the count does not even include the full-time equivalent employment of the people who work on a part-time or temporary basis for Uncle Sam—for example, the 884,000 members of the military reserves,” though it does include some 4.7 million already counted as employees of state and local governments (1999a, 1).

Moreover, governments increasingly have established regulations that in effect require bona fide private parties to work for the government. Tanzi and Schuknecht themselves take note of such “quasi-fiscal policies,“ which they describe as regulations that “become alternatives to taxing and spending” (203). In this recognition, they follow in a long line of analysts stretching back at least to Richard A. Posner in his capacity as the author of an oft-cited 1971 article “Taxation by Regulation.”

The relevant class of regulations, though, is much wider than it is usually recognized to be in the standard literature of economics and public choice. To be sure, all sorts of economic, environmental, health and safety, and social regulations continue to spew out of Washington and Brussels, among many other places (Grow 2003). In addition, however, the U.S. government especially requires ever more uncompensated information collection and reporting by its subjects in order to slake the Surveillance State‘s insatiable craving for the most minute details of everyone’s conduct (Bennett and Johnson 1979, Twight 1999). These Big Brotherish demands are justified by the despicable slogan that only those with something to hide will object, but in truth this vile rain falls on the righteous and the wicked alike, and one would have to be pretty dimwitted to expect the latter to report truthfully in any event.
According to Cylde Wayne Crew’s recent summary of U.S. federal regulation:

• The 2001 Federal Register contained 64,431 pages.

• In 2001, 4,132 final rules were issued by agencies.

• Of the 4,509 regulations now in the works, 149 are “economically significant” rules that will have at least $100 million in economic impact. Those rules will impose at least $14.9 billion yearly in future off-budget costs.

• The costs of meeting the demands of off-budget social regulations were as high as $229 billion according to the Office of Management and Budget. A more broadly constructed competing estimate that includes economic regulatory costs and paperwork costs pegs regulatory expenditures at $854 billion in 2001, or 46 percent of all FY01 [fiscal year 2001] outlays. (Crews 2002, 1-2)

The foregoing, shocking as it is, describes the regulatory burden being imposed at only the federal level of government. Simultaneously, the state and local governments, as well as various international bodies, continue to pour out endless streams of their own regulations, all of which entail resource costs and sacrifices of citizens’ liberties.

Because the public has less awareness of the burdens imposed by these regulations, many of which remain obscure and indirect in their operation and effects, governments encounter less resistance to their ongoing imposition of regulatory burdens than they encounter in their quest to collect greater revenue from explicit taxes laid on incomes, sales transactions, and property values. So far, there seems to be no political limit to the number of regulations that governments can and will impose. Hence, we are fast approaching a condition in which everything that is not forbidden is required, even as Americans, acting for all the world like faux-patriotic zombies, continue to reassure themselves incessantly that “it’s a free country.”

For present purposes, the point is that people occupied with regulatory compliance are not truly privately employed. Instead, they are in effect stealth government servants, working not for their own ends but doing the bidding of their political masters. In the present Western world, then, nearly everybody is actually a government employee, but rather than getting a government paycheck for our efforts, most of us are required to pay the government for the privilege of our own serfdom and to bear the risk of prosecution and imprisonment should our unpaid work on the government’s behalf prove unsatisfactory to our de facto “employer.”

The Logic of the Growth of Government in the Economically Advanced Countries

The growth of government has had many sources. In a sense, nothing less than a comprehensive social, political, legal, and economic history can tell the story fully. Within the vast empirical complexity, however, we can perceive patterns and identify crucial types of changes that have promoted the rise of the leviathan state in many countries since the mid-nineteenth century, a time when everywhere government was still ordinarily very small by comparison with its subsequent dimensions. By appreciating the major patterns, we can begin to understand better not only why governments have grown historically but also why they continue to grow currently and most likely will continue to grow for a long time to come in the economically advanced countries.

For understanding the dynamic process of the growth of government, I find it useful, at least at the start of the analysis, to separate causal factors into two categories. One category includes what I designate here as structural/ideological/political (SIP) changes; the other category includes crisis/ideological/political (CIP) changes. To some extent, these two classes of factors correspond to what John J. Wallis (1985) has called “trend” and “trigger” events. Later, I will insist that the two classes of factors are not independent, but interact with each other in important ways.

Structural/Ideological/Political (SIP) Changes

In the nineteenth century, earlier in some countries than in others, a number of interrelated changes began to accelerate. All had something to do with the processes that have come to be known collectively as modernization; they included industrialization, urbanization, the relative decline of agricultural output and employment, and a variety of significant improvements in transportation and communication. As these events proceeded, masses of people experienced tremendous changes in their way of life. In response, they turned to government to seek its assistance in order to gain from, or at least to minimize the losses attendant upon, the social and economic transformations in which they found themselves swept along.

The structural changes associated with modernization altered the perceived costs and benefits of collective action for all sorts of latent special-interest groups. Thus, for example, the gathering of large workforces in urban factories, mills, and commercial facilities created greater potential for the successful organization of labor unions and working-class political parties. New means of transportation and communication reduced the costs of organizing agrarian protest movements and agrarian populist political parties. Urbanization created new demands for government provision of infrastructure, such as paved streets, lighting, sewerage, and pure water supply. All such events tended to alter the configuration of political power, encouraging, enlarging, or strengthening certain special-interest groups, discouraging, diminishing, or weakening others. At nearly every step, opposing factions clashed, on more than a few occasions violently.

Simultaneously, the structural transformations altered the perceived costs and benefits of government response to various demands. For example, it became cheaper for governments to collect income taxes when more people received their income in the form of pecuniary payments traceable in business accounts, as opposed to unrecorded farm income in kind. The modern welfare state is often seen as originating in Imperial Germany in the 1880s, when the Iron Chancellor Otto von Bismarck, established compulsory accident, sickness, and old-age insurance for workers. Bismarck was no altruist. He intended his social programs to divert workers from revolutionary socialism and to purchase their loyalty to the Kaiser’s regime, and to a large extent he seems to have achieved his objectives. The lesson was not lost on governments elsewhere. By 1914, similar programs had gained enactment in most other western European countries, and even the United States—a laggard in this regard—was moving in the same direction, albeit at first only at the state or local levels of government and in federal programs restricted to war veterans and their dependents (Higgs 1996).

This development calls to mind another important aspect of the SIP events, namely, ideological change. From the mid-nineteenth century onward, collectivist ideologies of various stripes, especially certain forms of socialism, gained greater intellectual and popular followings, while traditional conservatism and classical liberalism increasingly fell out of favor and, with a lag, suffered losses in their political influence. By the early twentieth century, the intellectual cutting edge in all the economically advanced countries had become more or less socialistic (in the United States, in greater part, “Progressive”), and the masses also had become more favorably inclined toward support for various socialist or Progressive schemes, from regulation of railway rates to municipal operation of utilities to outright takeovers of industry on a national scale (Hayek 1949, Higgs 1987, 113-16).

Political developments mirrored the changes in the economy and the dominant ideology. Throughout the nineteenth century, democracy tended to gain ground. The franchise was widened, and more popular parties, including frankly socialist parties and labor parties closely allied with the unions, gained greater representation in legislative assemblies at all levels of government, more so, however, in Europe than in the United States. Everywhere the trend toward universal manhood suffrage and even women’s voting became seemingly irresistible. People insisted on casting a ballot in periodic contests to select their political leaders. Even Adolf Hitler came to power via the ballot box.

Whether structural, ideological, or political, the foregoing changes proceeded gradually. With the passage of time, various such changes reached a threshold at which the balance of forces tipped in favor of a new outcome with regard to government action. Modernizing economic transformation, collectivist ideological drift, and democratic political reconfiguration tended to bring about a changing balance of forces that favored, not always but as a rule, increases in the size, scope, and power of government. Such trends now have continued for more than a century and a half in the economically advanced countries.

Crisis/Ideological/Political (CIP) Changes

Superimposed on the gradually unfolding SIP transformations has been a series of discrete crises, of which the most significant were wars and economic depressions, especially the two world wars and the Great Depression. These crises also tended to promote the growth of government, although in certain cases, such those of Germany and Japan after World War II, the consequences of the crisis took a different form because of the wartime regimes’ defeat and the countries’ occupation by victorious powers intent on reforming the vanquished societies’ basic politico-economic institutions.

War is the preeminent government undertaking, and great wars, such as those of 1914-18 and 1939-45, have elicited the fullest expression of government power over economy and society. In World War I, all the major belligerents adopted some form of “war socialism” in order to mobilize resources and place them under government control for the prosecution of the war (Mises [1919] 1983, 133-76; Higgs 1987, 123-58). Price, wage, and rent controls, inflationary increases in the money stock, physical allocations of raw materials and commodities, conscription of labor, industrial takeovers, rationing of consumer goods and transportation services, financial and exchange controls, vast increases in government spending and employment, increased tax rates and the imposition of new kinds of taxation, and many other measures all figured prominently in the warring governments’ economic management (Porter 1994, 161-67). Mises called attention to “the stupidities of the economic policy of the Central Powers during the war,” noting that “measures and countermeasures crossed each other until the whole structure of economic activity was in ruins” ([1919] 1983, 146), and similar problems plagued the war socialism in other countries as well. Yet, everywhere the war left institutional and ideological legacies that promoted the subsequent resort to similar measures, not only in wartime but in peacetime crises as well. World War II, an even bigger exercise in mass human slaughter and massive property destruction, prompted similar measures and had similar results in most places (Porter 1994, 167-69; Klausen 1998). As Bruce Porter has written, “The mass state, the regulatory state, the welfare state—in short, the collectivist state that reigns in Europe today—is an offspring of the total warfare of the industrial age” (1994, 192). Likewise, in the United States, World War II left the society permanently shackled with what the Americans aptly call “big government” (Higgs 1987, 196-236).

In addition, especially in the United States, the economic crisis of the Great Depression brought forth similar government responses and left similar legacies of swollen state power and permanently lost liberties (Wallis 1985; Higgs 1987, 159-95; Higgs 1996, 261-63). Three decades later, the crisis events that crowded into the troubled years from 1964 to 1974—turmoil that for Americans sprang initially from U.S. involvement in the Vietnam War and from urgently contested race relations—had similar, if somewhat less sweeping, consequences (Higgs 1987, 246-54; Higgs 1996, 264-65; Matusow 1984; Shultz and Dam 1977).

SIP-CIP Interactions

Analysts have not been blind to the operation of both SIP and CIP events in bringing about the growth of government in the economically advanced countries, but they have tended to consider the two classes of factors as if they were independent. Often, if only implicitly, they have viewed the SIP factors as systematic and the CIP factors as stochastic—some have gone so far as to exclude wartime periods from their empirical analysis of long-term changes in the size of government (for citations of examples, see Higgs 1987, 288, n. 3). To proceed in this manner is a mistake, because SIP and CIP events are interrelated in important ways.

On the one hand, SIP events precondition how societies will respond to the outbreak of crisis. During the process of gradual structural, ideological, and political change, the various special-interest groups and ambitious political actors maneuver to position themselves so that when the opportunity arises, they will be better placed to realize their objectives. For the time being, they may be stymied by opposition, but they understand that in a crisis, the ordinary checks and balances of social and political life will be attenuated, and new possibilities will arise. Therefore, they prepare themselves for that day, and on occasion they may even take actions to precipitate the very crisis they long for—more than one “burning of the Reichstag” has occurred in the past century.

This routine ideological and political activity creates a configuration of forces that to some extent predetermines how crises will be dealt with and therefore what consequences they will have for the operation of the society in the period of post-crisis (altered) normality. Mises described an important instance of this phenomenon when he discussed the causes and consequences of wartime socialism during World War I:

War socialism was only the continuation at an accelerated tempo of the state-socialist policy that had already been introduced long before the war. From the beginning the intention prevailed in all socialist groups of dropping none of the measures adopted during the war after the war but rather of advancing on the way toward the completion of socialism. If one heard differently in public, and if government offices, above all, always spoke only of exceptional provisions for the duration of the war, this had only the purpose of dissipating possible doubts about the rapid tempo of socialization and about individual measures and of stifling opposition to them. The slogan had already been found, however, under which further socializing measures should sail; it was called transitional economy.

The militarism of General Staff officers fell apart; other powers took the transitional economy in hand. ([1919] 1983, 176)

Similar events took place in the United States, where socialist “liberals” and Progressives viewed the war as their long-awaited opportunity to put permanently in place many of the expanded government powers they favored, and which they and their political friends hoped to wield then and later (Rothbard 1989).

If SIP events precondition how crises will be handled and what consequences they will have, it is no less true that CIP events determine the character and operation of the political economy during post-crisis periods of normality and therefore they condition the unfolding of SIP events, sometimes for many decades after the relevant crisis. Countless examples of such interdependence might be given (see Higgs 1987, 150-56, 189-93, and 225-34 for discussions of the “legacies, institutional and ideological” of World War I, the Great Depression, and World War II, respectively, for the United States). I continue to adhere to the general understanding of such CIP-SIP interdependency that I described a number of years ago as follows:

The expansion of the scope of governmental power was path-dependent; where the political economy was likely to go depended on where it had been. Those who brought about the growth of government were motivated and constrained at each moment by their beliefs about the potentialities and dangers, the benefits and costs of alternative policies under current consideration. Their beliefs derived in turn from past events as they understood them. A genuine “return to normalcy” was unlikely after a crisis had provoked an expansion of the scope of governmental powers.

The irreversibility obtained not only because of the “hard residues” of crisis-spawned institutions (for example, administrative agencies and legal precedents), few of which necessarily show up in conventional measures of the size of government. More importantly, the underlying behavioral structure could not revert to its prior condition because the events of the crisis created new understandings of and new attitudes toward governmental action; that is, each crisis altered the ideological climate. Though the postcrisis economy and society might, at least for a while, appear to have returned to their precrisis conditions, the appearance disguised the reality. In the minds and hearts of the people who had passed through the crisis and experienced the expanded governmental powers (that is, at the ultimate source of behavioral response to future exigencies), the underlying structure had indeed changed. (Higgs 1987, 58-59)

Thus, what seem to be “trends” are as they are, at least in part, because of the “triggers” associated with great national emergencies. A complete understanding of the dynamic process of the growth of government requires not only that analysts take both into account but also that they give careful consideration to the interactions between them.

Mises and Ikeda on the Instability of the Mixed Economy

In several papers published during the 1920s and included in a collection titled Critique of Interventionism ([1929] 1996), Mises argued that the mixed economy (he called it “the hampered market order”), which by definition is subject to chronic, pervasive government intervention, is an unstable form of political economy. Over the following years, he returned from time to time to the same theme, most notably perhaps in his magnum opus, Human Action (1966), in which Part Six is called “The Hampered Market Economy” and includes ten chapters, the last of which deals with “The Crisis of Interventionism.”

Mises maintained that with respect to the politico-economic order, no “middle way” is possible: “There is no other choice: government either abstains from limited interference with the market forces, or it assumes total control over production and distribution. Either capitalism or socialism; there is no middle of the road” ([1929] 1996, 9; see also 18, 27, 28, 54).

Mises’s argument for the “impossibility” of the mixed economy rests on three interrelated claims: (1) the government’s interventions in the free market cannot achieve the aims that the interventionists seek; (2) because of the adverse effects of the interventions, ever more interventions will be required, which will produce even more adverse effects, and so forth; and therefore (3) ultimately the government will be driven to abandon the market system completely and to adopt full-fledged socialism with its total government control of the means of production, unless, on the contrary, the government has the wit to recognize that socialism also is unworkable and so instead the government gives up all its interventions and reverts to a full-fledged free-market order ([1929] 1996, 54 and passim). In Human Action, Mises added a fourth factor: “Interventionism aims at confiscating the ‘surplus’ of one part of the population and at giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible” (1966, 858).

In his probing and thorough reconsideration and elaboration of Mises’s analysis of interventionism, Ikeda calls attention to “the paradox of interventionism,” namely, that despite the mixed economy’s alleged instability, “among existing politico-economic systems, the interventionist mixed economy, all of its contradictions notwithstanding, is by far the most popular, widespread, and persistent of them all” (1997. 46). Indeed, Mises himself explicitly recognized this seeming paradox, remarking that “interventionist norms survived for hundreds of years, and since the decline of liberalism, the world is ruled again by interventionism. All this is said to be sufficient proof that the system is realizable and successful, and not at all illogical” ([1929] 1983, 21).

In response to his own recognition of the paradox, Mises declared: “The fact that measures have been taken, and continue to be taken, does not prove that they are suitable. It only proves that their sponsors did not recognize their unsuitability” ([1929] 1996, 21). Mises then proceeded to blame the “the empiricists” for failing to apply economic theory properly and hence for failing to understand what the actual consequences of various interventions had and had not been. Whatever the analytical shortcomings of the Historical School and other empiricists or of the sponsors of interventionist measures, however, Mises’s response fails to resolve the paradox. The point is not whether certain analysts or sponsors of interventionism failed to see the failure of the middle way, but whether that failure constitutes a fatal flaw that necessarily renders the system unstable and thus guarantees its replacement by either all-out socialism or the free-market order.

Ikeda provides a much more satisfactory resolution of the paradox. In his view, “the key to resolving this paradox is to realize that to claim the mixed economy is unstable is not the same thing as asserting that it is transitory. . . . By introducing contradictions into the system, interventions generate a process that causes the mixed economy continually to adjust and to evolve into novel and diverse forms over time” (1997, 215). Still, it need not become unviable quickly: “the roads between the minimal and maximal states can thus be very long and winding, and state expansion very gradual“ (215). Indeed, it turns out that because socialism itself is unworkable in the long run (for reasons that Mises and Hayek explained persuasively) and because, in Ikeda’s views, laissez faire is also unstable (owing to “governmental error“ and “shocks in ideological preferences” [216]), all politico-economic orders are unstable, and the mixed economy is the least unstable among them: “paradoxically, therefore, it appears that the product of interventionism, the mixed economy, though unstable, is likely to be more enduring than the pure forms of either collectivism or capitalism, offering as it does a much wider range of (ultimately futile) adaptive forms than either of its rival systems” (216). Hence, the first of Ikeda’s eight pattern predictions: “At any given time, nearly all economic systems will be mixed economies” (216).

Much more might be said about the endogenous logic of interventionism as explicated by Mises and elaborated by Ikeda, but because Ikeda himself has plowed this ground so thoroughly, I make no attempt to do so here. Before leaving the topic, however, I offer a few additional observations. In doing so, my intention is to appraise not so much the structure of the arguments already advanced as their applicability to the present-day reality of the economically advanced countries.

First, in much of their writing on interventionism and even on socialism, Mises, Hayek, and Ikeda assume good will on the part of the interventionists, that is, they assume that the interventionists seek to promote the broad public interest, not merely to achieve their personal ends or those of special-interest groups. Thus, the recurrent assertion that the interventionist measures cannot “achieve what their advocates expect of them” (Mises [1929] 1996, 5; see also 20, 28, 36) and the expressed need to explain “the failure of [intelligent, well intentioned, and public-spirited] public authorities to learn from their mistakes” (Ikeda 1997, 49; see also 104, 110-12, 121, 137; but compare 145-51 on “relaxing the assumption of benevolent public interest”). Although one may defend this assumption as a methodological device not intended to be descriptively accurate, I see only a minor purpose at best being served by proceeding with analysis on this basis. As Hayek (1944, 134-52) himself argued compellingly, the worst get on top in political life, and the “ruthless and unscrupulous” thrive in positions of government power (151; see also Bailey 1988). Although Hayek was writing with socialism in mind, the same tendency prevails in the mixed economy, though perhaps in slightly lesser degree (Higgs 1997). In addition, public affairs are rampant with rent seeking by one and all. As Ikeda properly notes, although “it is possible initially to abstract to a large extent from political self-interest and exogenous ideological change in order to isolate analytically a unique Austrian method of political economy . . . completely removing these two factors is . . . neither possible nor desirable in a realistic theory of political economy” (1997, 53), that is, in a political economy of genuine applicability in the interpretation of current public affairs.

The idea that well-intentioned authorities make mistakes is closely connected to the concept of “failed policies” that has come to play such a frequent part in popular discussion of government intervention in the market order. As I have argued elsewhere (Higgs 1995), however, notwithstanding the fair-mindedness of Austrian political economists to the interventionists they analyze, very few if any genuine failed policies last long. The all-to-numerous seemingly failed policies fail to achieve only their ostensible objectives; their actual objectives they achieve with remarkable success. In brief, the world of government affairs is the world of humbuggery; things are almost never what they are represented to be. All sides consider that they stand to gain by disguising their self-serving programs with a public-spirited rationale, and invariably they do so. Only rarely, however, is political talk anything but spin and counter-spin, and we will sooner find chastity in a brothel than truth or honest pursuit of the public interest in a political setting. As analysts, we do well never to lose sight of this pervasive smoke-and-mirrors aspect of politics. Our task in this respect is to understand the operation, effects, and limits of the humbuggery.

In much of their work on politico-economic systems, both Mises and Hayek wrote as though the nature of the system itself were the object of choice. Thus, for example, in the preface of Critique of Interventionism, Mises wrote: “Nearly all writers on economic policy and nearly all statesmen and party leaders are seeking an ideal system which, in their belief, is neither capitalistic nor socialistic . . . ” (xi). Rarely, however, is the object of political choice the system itself; as a rule, this stark choice presents itself only in consequence of the violent revolutionary overthrow of a regime or its total defeat in war (for example, in Russia in 1917 or in Germany and Japan after World War II). In general, political choices pertain only to programs that make piecemeal ad hoc changes within the context of an existing politico-economic framework, whatever its overall character may be. Of course, by making many partial changes, the overall character of a system eventually may be transformed, as it was in the United States between, say, 1885 and 1945. Even then, however, the nature of the resulting system is an artifact—the product of human action but not of human design.

This aspect of the workings of politics bears on the Austrian idea that the mixed economy may reach a point at which, the public choosers having piled intervention on intervention and the society having come to suffer all the resulting ill effects, “the recognition at some level of a systemic failure become inevitable” (Ikeda 1997, 123). Although such a recognition may occur--perhaps New Zealand in the late 1980s provides a case in point--it is highly unlikely. Rather than recognizing that the system has reached a point at which, “interventionism having lost its legitimacy, there is no longer a middle ground” (137), the political decision-makers are much more likely to respond in the classic manner of Franklin Delano Roosevelt, who proposed in the midst of the Great Depression to “try something” and, if it didn’t work, to “try something else,” not to abandon the whole system of interventionism. So long as an interventionist system retains any viability at all, its kingpins will cling to it, as the history of nearly all times and places bears witness. So long as the public will tolerate the countless burdens and insults of interventionism—a toleration that hinges almost entirely on their dominant ideology rather than on the system’s objective conduct and performance—then the response to even severe systemic difficulties is likely to be more muddling through, a moderation of the worst abuses perhaps, but not an overthrow of the system or a drastic retrenchment within it. In short, as Robert Bradley (2003) has observed, in the mixed economy even a crisis may lead only to “halfway measures of a new form” (Ikeda’s pattern prediction number 2 [1997, 217] also accords with this conclusion).

Finally, we must recognize the severe limitations of the Misesian model of the dynamics of the mixed economy (even as expanded by Ikeda) that arise from its inability to incorporate the effects of war on the course of the politico-economic order. As Ikeda acknowledges, “perhaps the most important omission, especially from the standpoint of empirical observation, is the effect of war and domestic conflict on the interventionist process. This means that the rapid growth of government in the United States during the twentieth century owing to war and similar national crises lies outside [the] scope” of the model (Ikeda 1997, 226). Directly and indirectly, however, war and preparation for war have been by far the most significant wellsprings of the growth of government during the past century—and they are again in the United States at the present time, owing to the so-called war on terrorism and the boost it has given to U.S. imperialism abroad and the Police State at home. A model of the dynamics of the mixed economy that excludes this aspect of the historical process, however useful it might be for revealing the endogenous forces at work, must be judged severely deficient for purposes of aiding the interpretation of actual (“complex”) events.

Double-Ended Constraint: The Actual Dynamics of the Modern Growth of Government

In the light of the foregoing discussion, I can be brief in presenting my own scheme for understanding the past and likely future course of the growth of government in the economically advanced countries. I maintain that in the short and intermediate terms—at least for the next few decades—reversion to laissez faire or anything close to such a system is impossible, but resort to full-fledged centrally planned socialism is scarcely more likely. As Jeffrey Rogers Hummel has remarked, “Rather than being inherently unstable, interventionism is the gravity well toward which both market and socialist societies sink” (2001, 530). Mixed economy, social democracy, democratic socialism, participatory fascism—whatever one’s preferred name for it—this system clearly has demonstrated its superior survival power under present conditions against all feasible alternatives. The politico-economic orders of the advanced countries will remain within the broad middle of the spectrum because they are effectively constrained at both ends from transforming themselves into one of the alternative, extreme systems.

Mises, Hayek, and Ikeda, among others, have diagnosed correctly the ills of interventionism and explicated its characteristic mode of operation and change. Such a system does generate tremendous burdens and opportunity costs, and over time the absurdities do compound themselves. However, the chief political decision-makers have come to recognize that so long as private enterprises are allowed to retain a modicum of room to maneuver, then continued high levels of productivity and even some economic growth can be expected. As Mises ([1929] 1996, 12-13) noted, the corruptibility of public officials helps to mitigate some of the most idiotic elements of interventionism, allowing a certain amount of important business to get done despite taxes and regulations that, if fully enforced, would preclude all progress. More important, however, “the adaptability of the capitalist economy has negated many obstacles placed in the way of entrepreneurial activity. We constantly observe that entrepreneurs are succeeding in supplying the markets with more and better products and services despite all difficulties put in their way by law and administration” (14). This remark, so reminiscent of Adam Smith’s observation that there is a lot of ruin in a nation, deserves much weight. So long as entrepreneurs are not crushed utterly, they will prove astonishingly creative in finding ways to satisfy market demands, whether the market be legal or “black,” and “interventionism is seen as a tribute that must be paid to democracy in order to preserve [the remnants of] the capitalistic system” (Mises [1929] 1996, 13).

In no event will public choosers opt for full-fledged socialism. The economic disasters wreaked by central planning in the Soviet Union, China, and other countries during the twentieth century have been taken to heart everywhere. No substantial support exists anywhere for the maintenance of such a politico-economic system, and where its remnants remain, as they do in Russia, China, Vietnam, and Cuba, they are gradually being phased out. The verdict is in—socialism doesn’t work—and the world has accepted it. People want a system that can “deliver the goods” for a modern standard of living. Therefore, the extreme collectivist end of the spectrum is no longer regarded as a viable option.

Nor is the political dictatorship that accompanied the economic central planning any longer a promising option. As noted earlier, all over the world, for better or worse, people want to cast meaningful ballots to select their political leaders. Democracy, ugly duckling that it is, bids fair eventually to become and to remain the only acceptable political system everywhere.

Laissez faire is unrealizable, too. Not because it could not “deliver the goods.” Indeed, it could deliver them in undreamt-of abundance if it were allowed to operate. But no population anywhere will allow it to operate. In today’s world, no substantial group of people is prepared to accept the personal responsibilities and to shoulder the personal risks inherent in genuine capitalism—which is, after all, as Joseph Schumpeter emphasized, a system of creative destruction. Certainly throughout the economically advanced world, people have come to demand that governments relieve them of nearly every personal responsibility, from caring for their own health to preparing for retirement to teaching their children about sex. In more ways than anyone can count, people now expect the government to take care of them, in the classic phrase, from the cradle to the grave. Thus, in the European Union, whose peoples exemplify this syndrome at its worst, “the European social-welfare system is thriving despite a decadelong call for change,” even as “a report from the European Commission shows Europe faces a looming crisis unless it enacts changes” (Grow 2003). Personal responsibility has become too painful for the citizens of the economically advanced countries even to contemplate. Locked in this ideology of dependency on and belief in the capacity and rectitude of state provision, they have no interest in living in a free society. (It goes without saying that a government cannot provide even a semblance of the demanded personal security unless it regulates and controls the people in countless ways and taxes them heavily to pay for its many “services.“) Thus, the dominant ideology of modern populations has rendered them uninterested in and incapable of living in a full-fledged market system, and by their participation in modern democratic political processes, they can make sure that no such system ever comes close to realization.

Thus constrained on both ends, the politico-economic systems of all the economically advanced countries stand condemned to fluctuate within the great middle of the spectrum. Should matters become too unbearably botched by high taxes or by intervention compounding intervention, then small retrenchments are possible, but in no event will such retrenchments move the system close to laissez faire, and in every case, once the retrenchments have served their purpose for a while, new pressures will be brought to bear on the system, compounding once again the absurdities of the existing mixed economy. A decade ago, Bruce Porter wrote that “a shrinkage of the American state appears about as remote as a drying up of the oceans” (1994, 294). Nothing has happened since to change that prospect, and with good reason we might express the same expectation for all the other economically advanced countries.

Footnotes:

1. For my earlier defenses of this thesis, some of which deal with matters not touched on here, see Higgs 1983; 1987, esp. 20-34; 1991a, esp. 5-8; and 1991b, esp. 66-68.

2. U.S. ratio computed from figures reported in U.S. Office of Management and Budget (2002, 292-93); ratios for various European countries from Tanzi and Schuknecht (2000, 6-7).

3. Calculated from data in Bureau of Economic Analysis, National Income and Product Accounts Tables, Tables 1.9 and 3.1, at http://www.bea.doc.gov/bea/dn/nipaweb/TableViewFixed.asp.

4. The group includes Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

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Acknowledgment: I am grateful to Sanford Ikeda for careful and helpful comments on a previous draft.


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

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CRISIS AND LEVIATHAN (25TH ANNIVERSARY EDITION): Critical Episodes in the Growth of American Government
The size and scope of government power has grown in response to crises of war and economic upheavals. Such increased power remains long after each crisis passes, threatening both civil and economic liberties, all at the behest of special interest groups.