Be frank about our heathen foe,
For Rome will be a goner
If you soft-pedal the loud beast;
Describe in plain four-letter words
This dragon thats upon her:
But should our beggars ask the cost,
Just whistle like the birds;
Dare even Pope or Caesar know
The price of faith and honour?
W. H. Auden1
The emergence of the modern mixed economy is the Great Transformation of the United States in the 20th century. Economic historians cannot avoid attempting to understand this momentous development. Until recently, however, most of their attempts were analytically casual. Many seemed to take for granted that an evolving capitalist, urban-industrial economy inevitably generates a larger and more intrusive government. Recently, several analysts of the growth of government have proposed more explicit hypotheses; some have attempted to test their proposed explanations against historical data (Borcherding, 1977; Meltzer and Richard, 1978, 1983; Peltzman, 1980; Vatter, 1979).2 Much of the literature has a rather mechanical quality and does little to illuminate the emergence of the mixed economy as a truly historical process.
Those who have studied the actual historical events of this processas opposed to a few aggregative time series crudely and partially descriptive of itrecognize three critical aspects: first, it involved not just greater spending, taxing, and employing by the government but, more fundamentally, an extension of the scope of the governments effective authority over economic decision making; second, this expansion of authority occurred largely during a few episodes of societal crisis, especially during the world wars and the Great Depression; and third, the growth of the scope of governmental activities paralleled a widely noticed change in the prevailing ideology. Economic historians increasingly have expressed interest in the role of ideology in relation to the emergence of the modern political economy (Olmstead, and Goldberg, 1975, pp. 197-199; Vatter, 1979, pp. 306-309; North, 1979, pp. 250-251, 259; 1981, pp. 45-58; Davis, 1980, pp. 9, 12; Weaver, 1983, pp. 295, 296, 322). Working hypotheses, however, are scarce.
I propose that we view the expansion of the scope of governmental power as path dependent, that is, as a genuine historical sequence in the sense that the actors who brought it about were motivated and constrained at each moment by their appreciation of that moments dangers and potentialities, which derived in turn from past events as they understood them. Hence, a genuine return to normalcy was unlikely after a crisis had provoked an expansion of the scope of governmental powers.
This irreversibility obtained not only because of the hard residues of crisis-spawned institutions (e.g., administrative agencies and legal precedents), few of which necessarily show up in the economists usual measures of the size of government. More importantly, the underlying behavioral structure could not revert to the status quo ante because the events of the crisis created new understandings of and convictions about the potentialities, workings, dangers, and desirabilities of governmental action; that is, each crisis altered the prevailing ideological climate. Though the postcrisis economy and society might, at least for a while, appear to have returned to precrisis conditions, this appearance disguised the underlying reality. In the minds and hearts of the people who had passed through the crisis and experienced the expanded governmental powersthat is, at the ultimate source of behavioral response to future exigenciesthe underlying structure had indeed changed.
The concept of historical path dependence has been discussed by economic historians in other contexts. Paul David, for example, has applied it in his studies of technological change. David (1975, pp. 11, 15) criticizes a mechanistic world view that allots to the past at best a transient role in shaping the future. He stresses historical irreversibility, where previous economic configurations become irrevocably lost. Long ago, Joseph Schumpeter (1950, p. 72) warned against commission of the mechanistic, trend-imposing sort of statistical crime: for any historical time series, he said, . . . the very concept of historical sequence implies the occurrence of irreversible changes in the economic structure which must be expected to affect the law of any given economic quantity.3
Economic historians could advance their understanding by adopting this truly dynamic approach to studying the growth of government. My task in the present article is to indicate how they might do so, using some schematic analysis and some analogies with certain models familiar to economists.
A Schematic View of the Problem
In my book, Crisis and Leviathan (1987, Chap. 2), I have shown that several commonly employed indexes of the size of government display the ratchet phenomenon during the 20th century: government grew suddenly much bigger with the onset of each great crisis; after the crisis it receded but usually not to the precrisis level nor even to a level that would have been reached had the precrisis rate of growth persisted instead of being displaced by the events of the crisis. Thus, crisis typically has produced not just a temporarily bigger government but also permanently bigger government, according to several conventional measures. Further, we have good reason to believe, as documented in my book, that a more informative measure of government, which ideally would gauge the scope of governments effective authority over economic decisonmaking, would also show this ratchet phenomenon. Henceforth, I shall simply take for granted that this has been the characteristic shape of the true time profile of the growth of government in the United States in the 20th century.4
Figure 1 presents a schematic representation of the ratchet phenomenon over the course of a single full episode. (Of course, 20th-century American history contains several such episodes. Analytically, however, each can be treated in isolation. Though the empirical details differ enormously from one to another, and though each unfolds in a way that depends in important respects on the precise character of the preceding ones, the process now under consideration is identical in each, so an explication of the model need focus on only a single episode.) Each full episode has five stages: I, precrisis normality (line segment AB in the graph); II, expansion (segment BC); III, maturity (segment CD); IV, retrenchment (segment DE); and V, postcrisis normality (segment EF). In the figure, the vertical axis measures the logarithm of an ideal index of the size of government; the horizontal axis measures units of time. Therefore, the slope of the time profile indicated by the line passing through the points ABCDEF shows the rate of growth of government.
As shown in Fig. 1, government is assumed to grow at exactly the same rate during stages I and V, the periods of pre- and postcrisis normality; it contracts in stage IV about as fast as it expands in stage II; and it does not change at all during stage III, its period of maturity. None of these assumptions is critical, and all are empirically suspect. But nothing in my argument depends on them. They are adopted only for simplicity of presentation, and they can be relaxed as the reader wishes.
All that I insist on in my analytical representation of the ratchet phenomenon is (1) point C lies far above point B, that is, there does occur a sudden increase in the true size of government; (2) point E lies far below point D, that is, a genuine retrenchment takes place; (3) point E lies above the counterfactual correspondent point E that it would have achieved at time t4 had the government continued its precrisis rate of growth between t1 and t4, the retrenchment is incomplete; and (4) during the stage of postcrisis normality the rate of growth is sufficiently great that any point such as F lies above its counterfactual correspondent such as F for an indefinitely long time (presumably until another crisis occurs). This last assumption is critical, for in its absence F could converge toward F and at the time of their meeting the entire (crisis plus post crisis) profile described by the points BCDEF could be described as a transitory event in the sense that the true size of government ultimately would be the same as if the crisis had never occurred.
The ratchet phenomenon, as specified here, is not a process in which all governmental growth arises from crisis. Government in the stage of precrisis normality is assumed to have a positive rate of growth. Not only does this growth produce an observably bigger government over the course of stage I; presumably, in the absence of the crisis, it would have continued to generate bigger government, as shown by the hypothetical line segment BEF in Fig. 1. As Edward Herman (1981, pp. 299, 300) has said and many others have recognized, the trend toward bigger government, which has been evident for many decades and in many counties, surely represents the workings of some very basic social forces and the demands of major interest groups.5 The crisis phenomenon in itself does not refute any variant of the hypothesis that secular forces were tending to produce bigger government. A monocausal interpretation is not the objective here.
One may conjecture, however, that crisis not only increases the true size of government permanently, relative to the size that secular forces alone would have produced. One can argue further that crisis affects the operation of those very secular forces. After all, the distinction between transitory and secular forces is analytical rather than substantive; it categorizes causal factors according to how persistently they operate, not according to what they are or how they work. Conceivably, without a crisis to break down some of the obstacles to the ongoing growth of government, the secular forces would eventually lose their potency to sustain the true growth of government. Several scholars have argued, for example, that high tax rates during the world wars conditioned citizens to accept the enormous levies required to finance the growth of the post-World War II welfare state (Bennett and Johnson, 1980, pp. 70-72; Dye, 1975, pp. 197-199; Piven and Cloward, 1982, p. 133). In such scenarios, the counterfactual growth path in the absence of crisis might well have been not BEF in Fig. 1 but rather BF. Crisis may be necessary to maintain the vitality of what many analysts implicitly assume to be a process of perpetual secular expansion.
Whether one views crisis as playing the latter, very strong, or the former, somewhat weaker but still significant, role, any account of the ratchet phenomenon must answer two questions. First, why does government grow suddenly so much bigger in stage II, especially when the crisis takes the form of mobilization for war? Few analysts have considered this question seriously; most simply assume that government must expand rapidly under such conditions. And they assume not just that government must perform one of its traditional functions, such as the provision of national defense, at a higher level but alsoand more significantlythat it must expand the scope of its effective authority, for example, by replacing to some extent the market economy with a command economy. But this assumption is arguably false. A careful examination of this question helps not only to shed light on the ratchet phenomenon; it also illuminates the very nature of government in a modern representative democracy. Second, why is the retrenchment of stage IV incomplete? Consideration of this question also can shed much light on the character of the modern political economy and more specifically on the role of ideological change in the true growth of government.
Why Stage II? A Cost-Concealment Hypothesis
Why does stage II, the expansion phase of the ratchet phenomenon, take place? Answering this question may appear unnecessary to some readers, who assume that rapid growth of government is an inherent aspect of great social crisis, but it is a critically important part of the argument as I have framed it. To see why, one must appreciate exactly what I am striving to explain and not confuse it with something I agree requires little or no explanation.
The difference resides in the distinction I shall consistently draw between Big Government, which denotes a wide scope of effective governmental authority over economic decisionmaking, and big government, which denotes many resources employed in the performance of limited, traditional governmental functions. The ratchet phenomenon at issue here has to do with the true growth of government, that is, with the growth of government only in the former sense. Obviously, in mobilizing for a great war, for example, the government must perform one of its traditional functions, national defense, at a much higher level of resource consumption. But it need not expand the scope of its effective authority over economic decisionmaking in order to accomplish this objective. Government presumably was already taxing, spending, and employing to some extent in order to maintain its peacetime military establishment. In any event, it certainly had the authority to undertake such actions. War requires only that it increase the magnitude of its traditional functional and fiscal activities. This produces bigger government but not Bigger Government.6
If, however, the government mobilizes for war not simply by increasing the scale of its traditional activities but also by widening the scope of its effective authority over economic decisionmakingfor example, by drafting men instead of hiring them or by legally preempting the use of raw materials instead of purchasing them in the commodities marketthen there is a shift toward Big Government. There is no technical necessity for government to expand its true size in response to crisis, not even when the crisis is mobilization for a great war. There may or may not be what might be termed an economic necessity. In the 20th century, of course, crisis actually has produced Bigger Government. But the reasons are fundamentally political, not technical or economic, though economic considerations play a critical part in prompting the pertinent political choices.
To develop my argument, I must assume something about the character of the American political system that goes against the grain of both popular mythology and the larger part of the theorizing in political science and public choice analysis: I assume that the government possesses a substantial degree of autonomy in its policymaking. The alternative, and more commonly accepted, assumption is that government represents and acts in accordance with the resultant of the various influence-weighted vectors of nongovernmental interests. Depending on the precise political model adopted, one assumes that governmental actions reflect the desires of the majority of voters, or the median voter, or only well-organized pressure groups, or just Big Business, or somebody else. But no matter which of these models one adopts, the possibility is ruled out that governmental officials may have and act upon interests of their own, interests not necessarily representative of or in accordance with those of any nongovernmental interest whatsoever.
To assume that the government possesses a substantial degree of autonomy is not to suppose that officials can do anything they please. They face many constraints, the nature of which traditional political science has done much to illuminate. Nor does my assumption carry any necessarily conspiratorial or malevolent connotations. Public officials may act as they do for the noblest as well as the basest of motives. Of course, it would be naïve to suppose that self-interest does not frequently enter their calculations, but one need notand probably should notassume that material or political self-interest alone impels them. Some governmental officials may act in accordance with their (ideologically determined) conceptions of the public interest (Kalt and Zupan, 1984). In doing so, however, they may still be acting autonomously insofar as their conceptions diverge from those nongovernmental parties.
In sum, to use the words of Eric Nordlinger (1981, p. 8), who has developed in some detail the model of governmental autonomy, I am assuming that
Public officials have at least as much independent impact or explanatory importance as any and all private actors in accounting for the public policies of the democratic state. The democratic state is regularly, though by no means entirely, autonomous in translating its preferences into authoritative actions, and markedly autonomous in doing so even when they diverge from societal preferences.7
Further, the autonomy of the government varies according to societal circumstances. It is greatest during periods of crisis. As Nordlinger (1981, p. 76) says, during some crisis periods . . . deference to state preferences is overriding. Under circumstances widely agreed to constitute a national emergency, especially during war or under conditions likened to war in character or seriousness (e.g., the Great Depression), 20th-century Americans have both expected and desired the government to do something, and do it immediately (Brown, 1983, pp. 21, 28; Edelman, 1964, pp. 78-83; Dye and Zeigler, 1981, pp. 283-284, 296, 313; Shultz and Dam, 1977, pp. 2, 155, 205; Leuchtenburg, 1964).
Few people outside the government possess enough information to form a clear appreciation of the precise nature of the existing exigency or to formulate well-shaped plans for dealing with it. Citizens therefore tend simultaneously to demand (a) more governmental action and (b) less research, public consultation, debate of alternatives, and general due process in the political and governmental process. In 1932, a full year before the momentous explosion of New Deal measures enacted during the famous Hundred Days, Felix Frankfurter complained that One measure after another has been . . . hurriedly concocted . . . [T]hey have been denominated emergency efforts, and any plea for deliberation, for detailed discussion, for exploration of alternatives, has been regarded as obstructive or doctrinaire or both (quoted in Gerber, 1983, pp. 267, 268). Involvement of nongovernmental people in decisionmaking takes time, and time is of the essence in a crisis. Hence, the authorities are freer to act on their own (possibly divergent) preferences. And they do.
It is one thing, however, for governmental officials to decide unilaterally on a course of action and something else to implement that decision when it requires widespread compliance or sacrifice by a public that, once aware of what has been done, may object. Politics being what it is, policies entail costs. For the most part, these costs fall on nongovernmental people, and they often fall heavily. Many draftees, for example, have noticed that wars never take the form of duels between heads of state. They have also noticed the low rate of soldiers pay, the high risks often associated with their involuntary occupation, and their subjection to a peculiar legal code that provides few protections of the civil liberties civilians take for granted. Of course, not everyone is conscripted in a crisis. But substantial pecuniary and other opportunity costs may still be imposed on all or most citizens by the governments national emergency policies.
The willingness of citizens to tolerate these costs, which must be borne if the policies are to be carried out, declines as the costs rise. This inverse relationship is but a corollary of the economists Law of Demand. Even the (initially) most popular war loses support as casualties mount, tax burdens rise, and military appetites consume more of the resources required to produce civilian goods and services. Governments know that the citizens have their limits. To push them beyond those limits jeopardizes not only the success of the policies but the very survival of the government.
But, obviously, citizens will react to the costs they bear only insofar as they are aware of them. The possibility of driving a wedge between actual and publicly perceived costs creates an irresistible temptation for governments pursuing high-cost policies in times of national emergency. Except perhaps where lives are being lost, no costs are so easily counted as pecuniary costs. And not only can each individual count them (e.g., his tax bill for the year); such costs can be easily aggregated for the whole society (e.g., the governments total tax revenue for the year). It therefore behooves any government wishing to sustain a policy that entails suddenly heightened costs to adopt devices to substitute nonpecuniary for pecuniary costs. This substitution may blunt the citizens realization of just how great their sacrifices really are and hence diminish their protests.
Murray Weidenbaum has observed, for example, that during the New Deal and World War II the federal government began to use its procurement policies to promote auxiliary social and economic objectives, a practice that has outlived by decades the emergency conditions that originally prompted it. He notes (1981, pp. 176, 177, emphasis added) that such actions have the advantages (to whom?) of not requiring additional, direct appropriations from the Treasury, and therefore restrictive procurement provisions seem to be costless. The disadvantages [to whom?], being more indirect, receive less attention.
The literature of public finance recognizes a phenomenon called fiscal illusion (Alt, 183, pp. 183, 208-210; Alt and Chrystal, 1983, p. 194). As Nordlinger (1981, p. 57) has written, this notion implicitly assumes that public officials periodically prefer to spend larger amounts than does the electorate as a whole, that they frequently increase the proportion of total revenues raised through indirect forms of taxation so as to conceal some of the costs borne by the electorate, and that thereby they come to translate their own preferences into public policy. Thus may the government of a representative democracy command more resources than it could in a world of perfectly informed citizens. Still, fiscal illusion, to the extent that it is facilitated only by such well-known stratagems as payroll withholding of income taxes or inflation-induced bracket creep, produces only bigger government, not necessarily a move toward Big Government.
Another way to conceal costs, which is to substitute a command economy for a market economy, does generate Bigger Government (Frey, 1978, pp. 30, 109, 117, 120). Economists have analyzed this kind of cost-concealment phenomenon in some detail in the case of the military draft (Oi, 1967; Anderson, 1982). Similar analysis can be applied to the full range of contrivances government employs to divert resources to uses of its choosing without bidding for them in open markets.
Many of these cost concealments go unnoticed because the government does make payments to citizens, ostensibly as a quid pro quo for resources received from them. Indeed, even draftees get some pay. But when the government has adopted price controls or otherwise rigged the marketsfor example, by assigning high official priorities to scarce raw materials directed to favored industriesthe prices paid in these transactions do not reflect the full opportunity costs of the goods and services traded. The government gets at least a portion of what it buys without paying full free market price for it. An implication is that private resource users and suppliers somewhere in the economy bear hidden costs of unknown or uncertain magnitude as a result of this governmental taking. (These costs are apart from the societal deadweight costs associated with the inefficient allocation of resources attendant on the economys adjustment to a distorted structure of relative prices. Only economists appreciate that these costs even exist.)8
But what of the argument that government really has no choice about substituting, at least to some extent, a command (cost-concealing) economy for a market (cost-revealing) economy? It is often alleged that the market economy cannot serve the desired purpose in a crisis, especially a crisis of vast wartime mobilization. The market, it is said, moves too slowly; and when national survival is at stake, it is imperative that the mobilization proceed as expeditiously as possible. The market, it is said, will not accept the risks inherent to retooling and otherwise reallocating capital resources for wartime employments of uncertain duration. The market, it is said, cannot accumulate the vast sums that may be required for certain enormous military-industrial undertakings. For all these reasons, it is argued that the government has no real alternative to displacement of the market economy in the crisis. The ends sought simply could not be achieved through a combination of pecuniary taxation and expenditure within the context of a freely functioning market economy. To mobilize national resources for war purposes . . . so it was said and believed, the market and its regulatory supplements were hopelessly inadequate. The need was for an administrative network with unifying, planning and directive capabilities . . . (Hawley, 1981, p. 98).
Insofar as this argument is correct, it says something rather different from what its proponents want it to say. Note first that everything the government accomplishes by means of a command-and-control system does happen; that is, the labor, management, capital, and raw materials are actually used to produce the goods and services on the governments shopping list. The fact that this is done shows that it is possible. Purely technical constraint cannot be the problem.
The pertinent question is: would it be possible to induce the citizen-owners of the resources to supply them as the government wishes without coercion or interference in the price system? The answer is, perhaps. One thing is certain: the full costs of the governments policy are actually borne. No tricks of deficit or inflationary finance or fiscal deception can possibly alter the fact that the opportunities forgone by the society when real resources are shifted from producing butter to producing guns or other governmental favored outputs are real, immediate, unshiftable costs. It is conceivable, however, that were the government to attempt to compensate by acceptable pecuniary payment every soldier, investor, and owner of raw materials, the required payments would exceed the maximum taxable portion of the national income, namely, the portion in excess of the amount required for the populations subsistence. In that event, no feasible fiscal exaction would be sufficient to provide the government the resources required to buy what it wants on the open market, where high-speed reallocation of resources and all forms of risk bearing as well as goods and services themselves must be paid for (Alchian and Allen, 1972, pp. 265-268; Hicks, 1946, pp. 125, 126, 143). So maybe the government could buy the goods and services on its emergency shopping list with tax revenues, in which case the argument for the necessity of the command economy in time of crisis collapses, or maybe it could not.
But what does it mean to say that the government could not levy taxes and then purchase everything it wishes to use in carrying out its policy? It means, rather plainly, that the government values the activity more than the citizens, that it simply takes from them coercively more than they are willing to supply voluntarily at a free-market price. Possible reasons why the government might get away with such coercive takings are (1) its monopoly of substantial force leaves citizens helpless to resist, which seems rather implausible in a society with functioning democratic institutions; (2) the costs are distributed in such a way that politically weak parties bear the brunt of them, which could be a viable situation even in a democracy, though it might entail substantial costs of enforcement; and (3) the costs are sufficiently concealed that politically influential citizens fail to appreciate their vast magnitude even when they share much of the burden. I find these three possibilities more plausible in ascending order. That is, the concealment of the true costs of governmental action in a crisis offers the most attractive hypothesis to account for why the command economy tends to displace the market during a national emergency in a democratic society.
To sum up, the hypothesis is that modern democratic governments expand the scope of their effective authority over economic decisionmaking during a crisis because most 20th-century people want them to do something, and the alternative, which is complete reliance on pecuniary fiscal and market mechanisms, reveals the costs of the governments policies so clearly as to threaten the viability of both the policies and the ruling, somewhat autonomous, governments themselves. Thus does Stage II of the ratchet phenomenon occur. It is, in large measure, the product of imperfect information and understandingand the use of ideology to fill this vacuumon the part of citizens. Surely, with the passage of time, citizens learn about the true costs of governmental policies. Why then do such governmental initiatives leave any trace at all? Why, in the terms of Fig. 1, is Stage IV, the postcrisis retrenchment, incomplete?
Why Stage IV? A (Partial) Hypothesis on Ideological Change
Why does the true size of government not recede to its counterfactual trend level as the crisis episode passes? Many scholars who have considered this question have answered it with reference to the politics of governmental bureaucracies, their private clients, and connected politicians. Thus, in Francis Rourkes succinct phrase (1976, p. 30), bureaucratic services generate constituencies that oppose their liquidation. Bruce Porter (1980, p. 68) has offered the hypothesis that after a wartime crisis the bureaucracy retains much of its growth . . . because Congress lacks the political will to force deep cutbacks in the absence of a pressing need to do so. Jack Hirshleifer (1976, p. 486) refers to the hypothesis that Wars and defense crises that require gigantic budgetary expansions leave in their wake a mass of officeholders, with sufficient political clout to resist budgetary contraction when the crises pass. Friedrich Hayek (1972, pp. 290, 291) has stressed the strategic position of entrenched bureaucrats who, because of their quasimonopoly of the expertise needed to assess the costs and benefits of the programs they administer, are well situated to present a compelling argument in support of perpetuating whatever they do: to wit, all the experts agree. In each of its variants, this hypothesis maintains that bureaucracies are more easily created than destroyed; hence, bureaus, bureaucrats, and the number of rules they issue all display the ratchet phenomenon over time (Friedman and Friedman, 1984, pp. 42, 115; Weaver, 1978; Mitnick, 1980, pp. 206-214).
This hypothesis clearly has some merit, and scholars have compiled a good deal of evidence consistent with it (Rourke, 1976, McKenzie and Tullock, 1975, pp. 204-207). Still, it cannot account fully for the incompleteness of the postcrisis retrenchment. The growth of Big Government involves a good deal more than expansion of the administrative corps and its proliferating volumes of regulations. It also involves, for example, substantial shifts in judicial interpretations of private and governmental rights and obligations under the Constitution (Murphy, 1972; Siegan, 1980) and great changes in the statutory constraints placed directly on economic actors by Congress. The hypothesis of bureau/clientele entrenchment fails to address these and other dimensions of the phenomenon in question.
Further, this hypothesis seems sometimes to verge on a questionable conspiracy theory. The bureau and its (relatively few but passionately interested) clients are presumed to extract substantial benefits for themselves, imposing the costs thinly over a much larger group of taxpayers or others who bear costs indirectly (e.g., potential entrants denied access to a trade or occupation; consumers who must pay higher prices for price-supported commodities). Evidently, those who suffer either do not know that they are bearing costs or consider the costs too small to justify taking any political action in an attempt to eliminate the burden. In the absence of any organized political action to resist the bureaus business as usual, it maintains or even increases its level of operation.
No doubt many such situations exist. Their economic logic is certainly ironclad. Yet, as I argue at length in my forthcoming book (Chap. 3 on ideology), economic logic, as traditionally understood, provides an insufficient basis for understanding political behavior. The possibility exists, for example, that a political entrepreneur (Hardin, 1982, pp. 35-37) could promote his career by publicizing and combating one or more such special-interest rip-offs (e.g., Senator William Proxmire and his Golden Fleece Awards). It is hard to hide a big hog at the government trough. If a flow of benefits to a narrow interest group is known to exist and permitted to persist unchallenged, even if only the more knowledgeable political actors perceive the situation, a plausible conclusion is that no one considers it a promising political issue. Exposing the largess provided to a special interest would, in many cases, produce little or no political mileage for the innovative politician taking up the issue.
One reason for the publics indifference to such revelations could be that most people approve of, or at least do not actively oppose, the governments policy notwithstanding its questionable or negative (but usually small) impact on them as individuals. What Victor Fuchs (1979, p. 16) has written about national health policies may apply as well to a variety of other governmental policies: The constant assertions that this or that regulation or subsidy is irrational and inefficient often fall on deaf ears simply because the majority doesnt see it that way. In a discussion of tax reform, George Shultz and Kenneth Dam (1977, pp. 51, 52, emphasis added) noted that advocacy groups play upon the resentment engendered by the frustration of these [established] expectations. Such groups thereby become even more effective in resisting the elimination of their tax preferences than they were in obtaining the preferences in the first place. The possibility exists that people may not object, or at least not object actively or strenuously, to something the government has an established policy of doing, complete with an administrative bureaucracy and a body of dependent beneficiaries. The attitude might be: well, we are all (myself included) getting more from government nowadays than we used to; and those people desire their fair share, too.9
Insofar as this ideological stance, which might be termed welfare latitudinarianism or vulgar equity, expresses an attitude more favorable toward established than proposed governmental actions, and to the extent that crises usher in numerous new governmental policy initiatives, as argued above, we have here a possible link between crisis and changes in the prevailing ideological posture toward the appropriate scope of governmental action in the economy.
Many scholars have remarked in a general way on just such a linkage. According to Nordlinger (1981, p. 38), past crises affect the attitudes of current generations, including current public officials. Thomas Dye and Harmon Zeigler (1981, pp. 98, 99, 101, 102) write that the Great Depression undermined the faith of both elites and nonelites in the ideals of the old order and had an important impact on the thinking of Americas governing elites . . . Roosevelts personal philosophy of noblesse obligeelite responsibility for the welfare of the masseswas soon to become the prevailing ethos of the new liberal establishment. . . .[This was, in part] a tribute to the effectiveness of Roosevelt himself as a mobilizer of opinion among both elites and masses. Dye (1975, p. 199) also expresses the idea that war conditions citizens to tolerate major increases in government activity, and thus, after the war, government activity remains on a higher plateau than before the war. Mancur Olson (1982, p. 71) agrees that The interwar depression, World War II, and other developments led to profound ideological changes that increased the scope of government . . . Lawrence Brown (1983, p. 58) asserts that big government is now a fact of life, the battles over welfare state breakthroughs largely over . . . Postwar generations that have grown up within big government take it for granted and would not do without it (emphasis added in this and all the preceding quotations in this paragraph). Although these statements refer variously to changes in attitudes, faith, ideals, thinking, philosophy, ethos, opinion, toleration, facts of life and things taken for granted as well as to ideological change as such, they all pertain to what I shall call ideological change. They all agree that the major crises of 20th-century America somehow caused changes in ideology and that these in turn somehow facilitated the permanent growth of government.
It is desirable to inquire just how crisis brings about ideological change in the specific sense of a shift in the desire for or toleration of a wider scope of effective governmental authority over economic decision-making. One way to approach this question is to exploit the many parallels, heretofore unnoticed, between the theory of ideological change and the theory of technological change.10
Technology and ideology both have to do with knowledge. The former pertains to a fairly hard form of belief whereas the latter occupies an intermediate zone between such hard knowledge as physical science and such soft beliefs as religion and metaphysics, but both pertain to beliefs about how the world works in a certain realm of comprehension. Both forms of belief have a great practical effect, the former in shaping the techniques of production and the latter in shaping sociopolitical organization and activity. Both are difficult to observe directly; hence, in tests of their influence, they are likely to appear as residuals. Thus, improvements in productivity that cannot be accounted for by observed changes in visible inputs are ascribed to technological change (Nadiri, 1970); shifts in political behavior that cannot be accounted for by observed changes in political self-interest, narrowly construed, are ascribed to ideological change (North, 1978, p. 973; Kalt and Zupan, 1984). In both cases, certain forms of qualitative evidence can be identified to lend plausibility to the claim that the technology or the ideology has in fact changed and that therefore these ascriptions are not merely giving a name to our ignorance. Technological change reveals itself in novel equations, blueprints, diagrams, and the like; ideological change reveals itself in the shifting rhetoric, values, and symbols of significant opinion leaders, as I have shown elsewhere (1987, Chap. 3).
Like all forms of knowledge, technology and ideology must be learned. They can be learned from storehouses of their lore, technical manuals or sacred texts as the case may be, or from experience. Technology derives heavily from experience with production, ideology from socioeconomic and political experience. Discrete shifts in technological or ideological beliefs are likely to reflect what has been learned from extraordinary events; decisive experiments, deliberate or natural, in the case of technology; societal crisis and response in the case of ideology. Both realms of belief have their great entrepreneursin technology, such as Whitney, Edison, and Ford; in ideology, such as Smith, Marx, and Keyneswho lead the way toward a radical recasting of pre-existing patterns of belief and consequent practice.
Viewed in broad perspective, both technological and ideological changes appear to proceed in an evolutionary manner. At any time, several alternative modes of belief and practice contend: alternating versus direct currents for electrical transmission; free markets versus collectivist planning for economic organization. Some belief/practice complexes prove ill-suited to survive. Economic and technical circumstances may give alternating current transmission systems an advantage over direct current systems; demographic or social structural circumstances may give collectivism an edge over the free market. But the direction in which the evolutionary process carries complexes of belief and practice is not wholly indeterminate.
In both cases, one may hypothesize, the movement of belief systems is path dependent. If highly capital-intensive techniques of production are in extensive use, learning from experience is most likely to propel the technology in the direction of advances in capital-intensive techniques. This tendency gives the system a determinate directionthough of course any process of learning remains ever subject to exogenous or random shocks (Popper, 1964) and may not always produce a single determinate outcome (Heiner, 1983). If, for example, relative prices have been changing so that labor is becoming more expensive relative to capital, producers will tend to substitute more capital-intensive techniques for more labor-intensive techniques. Experience with the new, more capital-intensive techniques, however, leads especially to discoveries about how to make this particular kind of technology work better. Such discoveries make the advantage of capital-intensive techniques even greater and hence encourage even more substitution in the same direction (David, 1975, pp. 60-68; Nadiri, 1970, p. 1148).
Ideological change may have a similar self-reinforcing character. Suppose, for example, that a great social crisis leads to a substitution of command-and-control devices for the processes of the free market. Experience under this new regime will generate learning of several kinds. To some extent bureaucrats and other rulers will improve their devices for making the command economy work better; new information systems, allocation rules, procedures for resolving interbureau disputes, and reconciling inconsistencies in the overall plan, and so forth. These improvements help to render the controls less obnoxious to aggrieved parties. Meanwhile, learning about how to make the market system work better more or less ceases. Citizens also learn that some of their prior beliefs about the impossibilities or dangers of governmental controls now appear groundless. Government may direct who can use aluminum or rubber, what consumer products may not be produced during the crisis, and so on, but it does not deny freedom of worship or nationalize the news media. Popular elections are held as scheduled. Many of the conservatives stock warnings about the prospective horrors of one thing leading to another are perceived to be overdrawn by the masses as well as the elites and are consequently discredited. Meanwhile, many people have discovered that necessity may prove the mother of opportunity. A command economy offers its own characteristic avenues of individual advancement, not just in the bureaucracy but also in the various favored sectors of the free-market economy. Those who occupy these privileged positions naturally develop not just an appreciation of their personal advantages but also a tendency to see the whole apparatus of governmental control in a more benign light. Thus, for a variety of reasons, many people are likely to learn to like, or at least to tolerate without active opposition, a regime that initially appeared to be only a temporary evil necessitated by a great social crisis.
It hardly need be added, of course, that all the while the government will do everything in its power to justify its policies, magnifying their benefits and virtues while depreciating their costs and vices.
Political men pour from the barrel
New lies on the old,
And are praised for kindly wisdom.11
This barrage of self-serving propaganda inevitably hits some targets, if only the unsophisticated or devoutly patrioticpossibly a huge throng.
So it is at least conceivable that ideological learning would take a discrete leap as a result of social crisis and the expansion toward Big Government that attends the crisis. This could be the precise process by which, in William Graham Sumners apt phrase (1934, p. 473), the experiment enters into the life of the society and never can be got out again.
Of course, counter movements of ideology can be imagined. For example, conservatives, seeing their nightmares emerging in the light of day, may redouble their efforts to propagate the Old Time Religion, perhaps with some success. Certainly, egregious examples that the conservatives can use to illustrate their arguments are easily found. There is a presumption in the theory sketched above that the progressive movements of ideology will outweigh such reactionary ones, but we need not attempt to settle where the balance lies a priori. Historical research can determine which of these countervailing forces has been decisive in the American experience. (The future, of course, is another matter; but as economic historians we need not trouble ourselves about that.)
The Task Ahead, with Some Illustrations
For any study guided by the analytical framework developed in the preceding pages, there is an associated program of historical research. For each critical episode, one seeks to identify and explicate the specific transmission process by which political actors linked fundamental socioeconomic and ideological causes to institutional innovations or revivals expanding the scope of governmental power over the economy. At least eight elements of the transmission process require study: (1) socioeconomic and political conditions before, during, and after the crisis; (2) prevailing ideologies before, during, and after the crisis; (3) leading persons and elites and the interest groups they favor, support or represent; (4) emergency legislation and executive orders; (5) emergency agencies, their activities, and their leadership; (6) consequences of and reaction to the emergency measures; (7) court challenges, resulting decisions, and innovations of legal, especially constitutional, doctrines; and (8) institutional legacies and perceived lessons of the episode. Together these eight elements supply the raw materials for an account of the circumstances, actors, motives, and actions that produced and sustained specific accretions of governmental power over economic decision-making during each crisis and episode and its aftermath.
This research program can be implemented within many specific areas of study. Table 1 shows six economic sectors within which my hypotheses with respect to cost concealment (ratchet stage II) and ideological change (ratchet stage IV) can be tested: transportation, labor, agriculture, industry, credit, and international trade. Others can be added. (In my forthcoming book I examine each of the topics listed in the table, but covering so much ground, I can do little more than scratch the surface in most cases. There is plenty of work here for a legion of scholars.) In each of these areas the governmentthe federal government in particularnow exercises either ongoing or episodic powers of extraordinary scope, powers that clearly emerged during the national emergencies of the period 1916-1945.12 The current extensive federal controls over transportation, labor markets, agriculture, credit, and international trade are fairly familiar to most economists. Contemporary governmental influences over industrial resource allocation (aside from those working indirectly through general tax and regulatory policies) focus heavily on the military-industrial complex, where vast research, development, and manufacturing activities respond not so much to market forces as to the visible hand of governmental decisions (Clayton, 1970; Melman, 1970, 174; Hanrahan, 1983).
As an illustration of an issue that lends itself to the proposed approach, consider the abandonment of the gold standard, certainly an important event, as it made possible the Age of Inflation during the past 50 years. In the economic crisis of the 1890s the Cleveland administration, ideologically committed to sound money, willingly paid a high political price to preserve the gold standard (Nevins, 1932, pp. 649-666, 674-676). In 1917, by the Trading with the Enemy Act, Congress delegated to the President the authority to regulate or prohibit transactions in foreign exchange or gold (Twight, 1985). Woodrow Wilson exercised this power, prohibiting all gold exports except those licensed by the Fed and the Treasury (Friedman and Schwartz, 1963, p. 220). Question: Why did Congress empower the President to interfere with the operation of the gold standard? Hypothesis: By exercising this power, the government could achieve its war-financing objectives more readily (i.e., fiscally cheaper) than otherwise; by denying access for foreign exchange or gold markets to unapproved transactors, the government in effect facilitated the reallocation of resources its leaders desired, imposing costs of unknown magnitude on the excluded transactors, their trading partners, and others who would subsequently have transacted with these parties.
Table 1. Landmarks in the Emergence of Federal Control over the Economy
|World War I||Great Depression||World War II|
|Shipping Board: Emergency Fleet Corp.; Adamson Act, Railroad Administration (nationalization of ocean shipping and railroads)||Emergency Railroad Transportation Act (extended regulation): Railway Labor Act of 1934||War Shipping Administration; Office of Defense Transportation; emergency powers of Interstate Commerce Commission (assignment of priorities; extended regulation; price fixing)|
|Military conscription; War Labor Board; War Labor Policies Board (selective deferrals; interventions and plant seizures in labor disputes)||Labor provisions of the National Industrial Recovery Act; Wagner Act (promotion of labor cartels); Fair Labor Standards Act (regulation of wages and hours)||Military conscription; National War Labor Board; War Manpower Commission (selective deferrals; allocation of labor; intervention and plant seizures in labor disputes)|
|Lever Act; Food Administration (price fixing and assignment of priorities)||Agricultural Adjustment Act of 1933; Soil Conservation and Domestic Allotment Act; Agricultural Adjustment Act of 1938 (price fixing, loans, marketing orders, acreage restrictions)||War Food Administration (food rationing); Office of Price Administration (price fixing, subsidies)|
|War Industries Board (allocation of materials; assignment of priorities; selective price fixing)||Reconstruction Finance Corp. (loans and investments); National Recovery Administration (promotion of product sellers cartels)||War Production Board (assignment of priorities; restrictions on civilian production); Defense Plant Corp. (plant construction); Office of Price Administration (price fixing)|
|War Finance Corp. (loans); Capital Issues Committee (regulation of securities issues, allocation of credit)||Reconstruction Finance Corp. (loans); Securities and Exchange Commission (regulation of securities issues); Farm Credit Administration (loans); Home Owners Loan Corp. (loans); Banking Act of 1935 (more centralized government control of money and banking)||Reconstruction Finance Corp. (loans); Federal Reserve System (allocation of credit; control of interest rates)|
|Trading with the Enemy Act; War Trade Board (licensing and regulation of traders; seizure and administration of enemy property)||Presidential Proclamation of March 6, 1933; Gold Reserve Act (control of all transactions in gold and foreign exchange; abandonment of gold standard)||Board (later Office) of Economic Warfare; Foreign Economic Administration (control of and direct participation in international trade); War Production Board (import licensing)|
To test this hypothesis, one could obtain evidence on the legislative background of the Trading with the Enemy Act, Section 5(b), and ask: Who proposed this section? Whom, if anyone, did this person represent? What was the ideological rationale presented? Did a congressional committee hold hearings on this matter and if so, what was revealed? Who voted for and against the act?
Tracing the institutional and ideological consequences of this wartime act, one would find that it supplied the legal basis for President Franklin D. Roosevelts banking-holiday proclamation of March 6, 1933, the first step in a series of actions during 1933-1934 that permanently removed the United States from the gold standard (Freidel, 1973, pp. 213-236; Friedman and Schwartz, 1963, pp. 462-483). Question: At what point did the ideological commitment of powerful elites to the gold standard, a commitment that had proved decisive during 1893-1896, wither to the point that the New Deals repudiationist measures, especially its abrogation of contractual gold clauses (including the governments own!), became politically feasible? Hypothesis: Having experienced the gold market restrictions during World War I, many politically influential people viewed the monetary departures of 1933-1934 more favorably than they otherwise would have.
To test this hypothesis, one could examine the private papers to the principal actors in Congress and the Roosevelt administration as well as the records of congressional committee hearings and floor debates, especially on the Thomas Amendment to the Agricultural Adjustment Act. In his famous dissent in the Gold Clause Cases (294 U.S. 361-381, at 374, fn. 3), Justice McReynolds quoted Senator Elmer Thomas statement to the effect that the inflation facilitated by his amendment would make it possible to transfer from one class to another class in these United States value to the extent of almost $200,000,000,000 . . . first, from those who own the bank deposits . . . [second] from those who own bonds and fixed investments. The pertinent archival and documentary evidence should shed light on whether many others supported the abandonment of the gold standard out of the same redistributionist motives expressed by the senator and reveal whether anyone appealed to the experience of World War I while working to get the United States off gold in 1933-1934. Clearly, the costs of this policy could be concealed more easily than the costs of an equivalent fiscal transfer to accomplish the same redistributional ends.
Consider another example, the Adamson Act of 1916. Congress passed this statute at the urging of the President in an attempt to prevent a nationwide strike by the railroad operating brotherhoods. Ostensibly an 8-hour law, the act in effect simply imposed higher wage rates on the interstate railroad companies without providing for any offsetting increase in railroad rates. The Supreme Court, by a 5-4 vote, upheld the Adamson Act in the case of Wilson vs New (243 U.S. 332 ). One of the dissenters, Justice Pitney, argued that the government had not only exceeded its constitutional authority but in the process had concealed and shifted the costs of its action. [T]he emergency, he said, conferred no power upon Congress to impose the burden upon the carriers. If the public exigency required it, Congress perhaps might have appropriated public moneys to satisfy the demands of the trainmen. (243 U.S., at 382, emphasis added). Did the President or anyone in Congress ever consider such a fiscal alternative? What ideological rationales were employed by parties supporting and opposing the act? Who voted for and against it?
The institutional and ideological legacies of the Adamson Act appear to include the nationalization of the railroad industry during 1918-1920, the Transportation Act of 1920, which created a Railway Labor Board to mediate disputes, and the Railway Labor Acts of 1926 and 1934. Also in 1934, Wilson vs New provided an important precedent for the majority opinion in the Supreme Courts Minnesota moratorium decision (290 U.S. 398). In this opinion, Chief Justice Hughes followed the Wilson doctrine that While emergency does not create power, emergency may furnish the occasion for the exercise of power. He also diminished the protection of the Constitutions contracts clausenot to be read with literal exactness like a mathematical formulathereby infuriating the four dissenting justices, who saw in this decision the potentiality of future gradual but ever-advancing encroachments upon the sanctity of private and public contracts. The dissenters prophecy appears to have been accurate. The legal documents to test this view are readily available. It would make an interesting study, for example, to trace how often, in what manner, and in what types of cases the courts Minnesota moratorium ruling has been cited (as suggested by Alston, 1984, p. 446).
Consider another example, the evolution of federal support for labor unions organizational activities and collective bargaining. Such support first appeared during World War I (Kennedy, 1980, pp. 258-269). The War Labor Board, which President Wilson created by executive order to mediate labor disputes and thereby prevent potentially crippling work stoppages in critical war production facilities, adopted a general policy position that supported, inter alia: the right of workers to organize in trade unions and to bargain collectively, through representatives of their own choosing, free of any interference by employers; protection of workers from dismissal because of membership in or activities on behalf of unions; maintenance of all existing union standards of wages, hours, and working conditions; and the basic 8-hr day (Marshall, 1918, pp. 445, 446).
Fifteen years later, the National Industrial Recovery Act, Section 7(a), prescribed that every code of fair competition must guarantee these same rights to workers (48 U.S. Statutes at Large, at 198, 199). When the Supreme Court struck down the NIRA in 1935, Senator Robert Wagner hastened to secure passage of the National Labor Relations Act (49 U.S. States at Large 449), Sections 7 and 8 of which reinstituted these rights once again. Clearly, it is no coincidence that these three governmental declarations of union rights contain virtually identical provisions. A study of their linkage could ask not only how much impact the policies of the War Labor Board had on the labor laws of the 1930s but also inquire into the underlying motives. In both 1918 and 1933, it appears that the government offered these rights to labor unions in an attempt to buy them off: in the first instance, to prevent work stoppages from jeopardizing the Wilson administrations war mobilization program; in the second instance, to deliver to the unionist a quid pro quo to induce their acquiescence in the Roosevelt administrations granting of monopoly power to industrialists.
Further inquiry along these lines would carry one through an investigation of the National War Labor Board of World War II, the War Labor Disputes Act of 1943, and on to the postwar Taft-Hartley Act, which institutionalized some of the restraints on union activities first imposed during the war (Polenberg, 1972, pp. 154-183, 242). Along the way, one could ask: At what point in the 20th century did labor unions win wide public acceptance as legitimate economic institutions? Did this change in public attitudes grow largely out of crisis episodes such as the mass unemployment at the trough of the Great Depression? Polenberg (1972, p. 242) asserts that Before 1941 large numbers of businessmen had refused to concede that industrial unions were here to stay; by 1945 many more were reconciled to the inevitability if not the desirability of collective bargaining. Are the data from contemporary polls or the position statements of business organizations consistent with this hypothesis? Have governments during crises used unions as components of a cost-concealing political strategy? After all, the total costs imposed on society by extensive unionization far exceed the amounts the government would have to transfer directly to union members to provide them with an equivalent gain in wealth (Reynolds, 1984); but the fiscal transfer would be visible and easily measured by taxpayers and other opponents of such largess.
Clearly, the potential for application of the suggested approach is vast. The foregoing illustrations are intended only to suggest the kinds of questions and research materials involved in testing the cost-concealment and ideological-change hypotheses associated with my characterization of the ratchet phenomenon. Research of this kind challenges economic historians to spend less time in the computer room and more time in the library and the archives. It still requires that they keep a firm grasp on theory, though the pertinent theory must be somewhat broader than the usual microeconomic and macroeconomic apparatus wielded by economists. Political and legal analystsand old-fashioned historians as wellhave much to teach us. Broadening our scholarly competence will pay large dividends in this kind of research. The retooling is worthwhile because the subject is so important. If we successfully meet this analytical challenge (and who is better equipped than economic historians to do so?), our place in modern social science will be secured beyond question.
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I have discussed the subjects of this article over several years with many people. My gratitude extends to students, colleagues, and seminar participants at the universities of Washington, Houston, Texas A & M, Duke, Pennsylvania, Pennsylvania State, and Georgia, at Lafayette College and Gettysburg College, at the Economic History Associations 1982 workshop on governmental regulation, and specifically to Lee Alston, Price Fishback, Aileen Kraditor, Don McCloskey, Doug North, Joe Reid, Andy Rutten, and Charlotte Twight. Editor Larry Neal and an anonymous referee at Explorations in Economic History gave me useful comments on an earlier draft. My son Matt Higgs compelled our computer to draw Fig. 1 for me. I apologize to those whose help or stimulation Ive no doubt forgotten. For financial support of my research, I am grateful to the Center for Libertarian Studies, which awarded me a Ludwig von Mises Fellowship in the Humanities and Social Sciences during 1983-1984. Of course, only I am responsible for what has come of it all.
1. The Sea and the Mirror, 1942-1944.
2. See Higgs (1987, Chap. 1) for a critical survey of hypotheses about the growth of government during the past century.
3. Others who have recognized the importance of path dependency include Nutter (1883, pp. 44, 97) and Alt and Chrystal (1983, p. 248).
4. For a brief examination of the issue of how to measure the growth of government, see Higgs (1983a). I conclude there (p. 155): All quantitative indexes of the size of government share a common defect: their changes may indicate either changes in the scope of effective governmental authority or merely alterations in the level at which government operates within a constant sphere of authority ... Further, quantitative indexes may register little or no change even when the substance of governmental power changes enormously.
5. For some comparative international data on the growth of government, see Kuznets (1966, pp. 236-239), Pathirane and Blades (1982), and Alt and Chrystal (1983, pp. 199-219).
6. My distinction between big government and Big Government, along with my focus of analysis exclusively on the later, explains why this paper has nothing to say about fiscal and monetary policies, deficits, inflation, Keynesiansism, and related issues that pertain to the governments macroeconomic policies, neither during crises nor at other times during the 20th century. The U.S. government possessed the authority to conduct fiscal and monetary policies, including the power to incur budgetary deficits or to inflate the money stock, from the very beginning. Of course, the government did not assume a deliberately activist, managerial posture with regard to these powers until the 1930s, especially after the recession of 1937-1938 (Stein, 1969, 1984). But that change signified only a different way of exercising a long-established power, not an increment of Big Government in my sense.
7. Others who have recognized the importance of governmental autonomy include Knight (1982, p. 231), Kalt (1981, pp. 580-583), Brown (1983, p. 45), Tullock (1983, p. 114), and Frey (1978, pp. 95, 155). For an exceptionally full and careful treatment of this issue, with a valuable survey of the related economic literature and an insightful empirical application, see Twight (1983).
8. Compare Becker (1983, pp. 373, 381-388). In Beckers model, people are assumed not only to know about deadweight costs; they are further assumed to base their political behavior on such knowledge. Becker offers no empirical evidence in support of this assumption, which seems to me extremely fanciful.
9. See the related discussions of the endowment effect by Thaler (1983, pp. 64, 65), of hysteresis by Harden (1982, pp. 82, 83), and of universalism and reciprocity by Alt and Chrystal (1983, pp. 196, 197).
10. On the theory of technological change, see Mansfield (1968) and Rosenberg (1971, 1976). For an extended explication of the concept of ideology in relation to political economy and economic history, see my forthcoming book, Chap. 3, and the many sources cited there. See also the exchange between Higgs (1983b) and Kraditor (1983).
11. Robinson, Jeffers, Cassandra, 1948 (with apologies for my rearrangement of lines and capitalization).