Crisis and Leviathan

Critical Episodes in the Growth of American Government

The Independent Institute

Contents

The Sources of Big Government: A Critical Survey of Hypotheses

One of the most striking phenomena of modern times has been the steady growth of the government sector. Despite the hot political debates that have greeted the successive steps of government expansion, there is surprisingly little scientific understanding of the forces tending to bring it about.

J. HIRSHLEIFER

We must have government. Only government can perform certain tasks successfully. Without government to defend us from external aggression, preserve domestic order, define and enforce private property rights, few of us could achieve much. Unfortunately a government strong enough to protect us may be strong enough to crush us. In recognition of the immense potential for oppression and destruction, some consider government a necessary evil. Ludwig von Mises, an arch-libertarian but not an anarchist, disputed this characterization. "Government as such," he declared, "is not only not an evil, but the most necessary and beneficial institution, as without it no lasting social cooperation and no civilization could be developed and preserved." Like all who inherit the Lockean tradition, Mises believed that a strong but limited government, far from suffocating its citizens, allows them to be productive and free.

For more than a century after its formation the United States had a government that approximated, perhaps as well as any actual government ever did, the ideal envisioned by Mises: strong but limited. Despite major shortcomings, especially its oppression of blacks and Indians, the government created a political and legal environment conducive to rapid economic development, fostering what Willard Hurst, the eminent legal historian, has called a "release of energy." Inventiveness, capital formation, and organizational innovation flourished as never before. Specialization and trade increased prodigiously. During the nineteenth century the nation became the world's richest and freest society.

The nation's second century, however, has witnessed a decline of the commitment to limited government and extensive private property rights. In 1900 the government still approximated a minimal state. Americans did not practice pure laissez-faire — no society ever did — but they still placed binding constraints on government and allowed relatively few projections of its power into the economic affairs of private citizens. That long-established restraint has largely dissolved during the past seventy years. Government now suffuses every aspect of economic and social life; it may now, as Warren Nutter said, "take and give whatever, whenever, and wherever it wishes." Merely to list its numerous powers would require volumes: farms, factories, and stores; homes, schools, and hospitals; science and technology; even recreation and amusements — all feel its impact. Virtually nothing remains untouched by the myriad influences of governmental expenditure, taxation, and regulation, not to mention the government's direct participation in economic activities. An abbreviated organizational chart for the federal government, shown here as Figure 1.1, suggests the gargantuan scope of modern government, even though it represents only a general outline of the activities undertaken at a single level of government.

How did this momentous transformation of American political, legal, and economic institutions occur? What motives and convictions inspired it? What socioeconomic developments promoted or obstructed it? Who expected to gain, or lose, as a result? What persons, elites, and interest groups played decisive roles? What circumstances allowed them to seize the helm of history? Did the growth of government proceed smoothly or episodically, and what forces shaped the profile of its change? I shall attempt to answer these questions.

My answers necessarily will leave much of the story untold. So many events and influences have had a bearing that nothing less than a comprehensive social, political, legal, and economic history of the past century could begin to answer all the pertinent questions. My objectives are more limited, partly because so much has already been done.

Several explanations of the growth of government have been advanced. Too often, however, the proponent of a particular hypothesis extols it as if no other wheel will roll. But many of the proposed explanations contain valid insights, and they are not necessarily mutually exclusive. Nothing is gained and much is lost by attempts to locate a single source of Big Government. I reject the approach that seeks a monocausal explanation. I shall strive instead to comprehend what the various hypotheses can and cannot explain, applying them selectively and using them as points of departure in developing my own ideas.

Unfortunately some explanations of the growth of government deal in abstractions that obscure the very nature of government. Some speak of government as if it were One Big Nonhuman Thing, a gigantic man-eating machine. The Spanish philosopher José Ortega y Gasset, for example, said, "In our days the State has come to be a formidable machine ... set up in the midst of society ... anonymous ... a machine whose existence and maintenance depend on the vital supports around it ... sucking out the very marrow of society." But for better or worse a government is itself human: it is simply the collectivity of persons who exercise legal authority.

Treating government as One Big Nonhuman Thing, distinct and apart from the people, encourages misleading characterizations of what government is and does. Real governments cannot survive without the sustenance and support, or at least the tolerance, of nongovernmental people. Moreover, some people are always circulating between the rulers and the ruled. The American government includes several levels — federal, state, local, and hybrid; and several branches — legislative, executive, judicial, and hybrid. The sheer number of separate governmental entities belies a conception of government as a coherent institution. There are more than eighty thousand separate governments in the country today, more than sixty thousand with the power to tax. Obviously the multitude of people occupying positions of authority within these varied and numerous governments lack unity of purpose. Conflicts within government may be as common and significant as conflicts between the rulers and the ruled. Because no one in the huge, fragmented domain of authority can simply impose his will on all the others, governmental policies normally result from rivalry and struggle resolved through negotiations, compromises, deals, pulling and hauling. We would do well to bear constantly in mind that the American government is and always has been not One Big Nonhuman Thing but rather many coexisting human institutions of varying function, scope, and authority. My concern in this book is mainly with the widening scope of the legislative, executive, administrative, and judicial powers exercised by the persons who constitute the federal government. One must remember that the growth of the federal government is only part of the story of the growth of government.

EXPLANATIONS OF THE GROWTH OF GOVERNMENT

Modernization

Reading between the lines of many historical works, one encounters the Modernization Hypothesis. It maintains that a modern urban-industrial economy simply must have an active, extensive government; that laissez-faire in the late twentieth century is unimaginable. Declamations about the absurdity of horse-and-buggy government in the Space Age or the impossibility of turning back the clock of history give rhetorical thrust to the idea. Exactly why a modern economy must have Big Government usually remains obscure.

Subscribers to the Modernization Hypothesis sometimes argue that a modern urban-industrial economy must have considerable governmental activity because it is so complex. "That the increased complexities and interrelationships of modern life necessitate this extension of the power of the state," insisted Calvin Hoover, "is no less true because it is such a well-worn cliché." No one denies that the economy has become more complicated. New products, technologies, and industries have proliferated. The population has grown and become more concentrated in urban areas. Interregional and international movements of goods, money, and financial instruments have multiplied. Increased specialization has made individuals less self-sufficient, more dependent on a vast network of exchange.

Yet one cannot correctly infer that, merely because of growing complexities, economic affairs have required more governmental direction for their effective coordination. Many economists, from Adam Smith in the eighteenth century to Friedrich Hayek in the twentieth, have argued that an open market is the most effective system of socioeconomic coordination, the only one that systematically receives and responds to the ever-changing signals transmitted by millions of consumers and producers. This argument turns the Modernization Hypothesis on its head: while the government might be able to coordinate economic activities in a simple economy, it could never successfully do so in a complex one. The artificial shortages and gasoline lines of the United States in the 1970s — not to mention the chronic frustration of consumers in the socialist countries — give force to the critics' argument.

How a market economy operates, of course, depends on the character and degree of the competition that propels it. Some observers believe that the emergence of large corporate firms in the late nineteenth century fundamentally altered the economy's competitiveness, ushering in a new era. "This transformation of competition into monopoly," wrote V. I. Lenin in 1916, "is one of the most important — if not the most important — phenomena of modern capitalist economy." Accepting this claim, one might interpret the growth of government during the late nineteenth and early twentieth centuries as a reaction, a development of "countervailing power," by which the public resisted the higher prices, lower outputs, and distributional distortions that big business would have entailed under unregulated conditions. Representative events include the enactment of antitrust laws and the creation of the Federal Trade Commission and the various industry-specific regulatory commissions such as the Interstate Commerce Commission and the Federal Communications Commission. In short, according to this interpretation, economic modernization fostered the growth of private monopoly power, and government grew more powerful to hold that pernicious, irresponsible power in check.

The explanation is weak in both theory and fact. Many large corporate enterprises developed during the late nineteenth century, and the turn of the century witnessed a spate of mergers crowned by the creation of such industrial giants as United States Steel, American Tobacco, and International Harvester. But no one has ever established that the economy as a whole became substantially less competitive. Even within specific industries neither huge firms nor high industrial concentration ratios necessarily imply an absence of effective competition. The founders of the big firms sought monopoly power and profits, to be sure, but rarely did they succeed in gaining these objectives for long. The decisive aspects of competition are dynamic — chiefly technological and organizational innovation — and under conditions of dynamic competition neither a firm's bigness nor an industry's high concentration poses a serious threat to the welfare of the public. Furthermore, despite the almost exclusive attention lavished on manufacturing by analysts of the monopoly-power school, manufacturing is not the only important sector of the economy; nor is it in a relevant sense the "dominant" or the most "strategic" sector. Elsewhere — in wholesale and retail trade, for example — competition clearly increased enormously during the decades around the turn of the century. Consider how many local bastions of monopoly power must have been battered down by the advent of the mail-order distributors such as Sears, Roebuck & Company and Montgomery Ward. In many industries the monopolistic proclivities of large firms in concentrated industries were held in check by foreign competitors, actual or potential.

Besides, the government's actions have tended more to preserve weak competitors than to assure strong competition. In this respect the historical performances of the FTC and many of the industry-specific regulatory commissions are notorious. As George Stigler has said, "Regulation and competition are rhetorical friends and deadly enemies: over the doorway of every regulatory agency save two should be carved: 'Competition Not Admitted.' The Federal Trade Commission's doorway should announce, 'Competition Admitted in Rear,' and that of the Antitrust Division, 'Monopoly Only by Appointment.'" The government's regulatory agencies have created or sustained private monopoly power more often than they have precluded or reduced it. This result was exactly what many interested parties desired from governmental regulation, though they would have been impolitic to have said so in public. The "one common conclusion" reached by historians of regulation is that "regulatory politics involved an intricate, complex, struggle among intensely competitive interest groups, each using the machinery of the state whenever it could, to serve particularistic goals largely unrelated to 'public interest' ideology except in the tactical sense." But antitrust activities and the regulation of entry, prices, and services within industries — however one views their motivation and results — constitute a minor part of the multifarious activities of modern government.

Sometimes arguments in support of the Modernization Hypothesis make much of the population's increased crowding. People living cheek by jowl inevitably create spillover costs, which economists call "negative externalities"; outsiders unwillingly share the costs of others' actions. Pollution of air or water is a familiar example. If the legal system fails to define and enforce a private propery right over every valuable resource, including clean air and water, then negative externalities may entail an inefficient pattern of production and resource use in the free market. For example, smoke from your factory smokestack may soil the clothing hanging on my clothesline, yet I cannot make you pay for the damages; nor can I effectively constrain or prevent further emissions. From a social point of view the activity of your factory is excessive because a portion of its true cost of operation is shifted without consent or compensation onto outsiders like me, who have no voice in determining how your factory is operated.

Governmental regulation conceivably can ameliorate such conditions. Whether historically it has done so has depended on how the government has framed and enforced its regulations, which has partly determined the magnitudes of the costs and benefits of its interventions. Proponents of the Modernization Hypothesis take for granted that negative externalities historically have been common and significant, that much governmental activity has been motivated by a desire to rectify such conditions, and that the interventions have routinely succeeded in bringing about a more efficient pattern of resource use. Each of the suppositions may be questioned. Some economists doubt that government can or will deal successfully with externalities. As Leland Yeager has said, government is itself "the prototypical sector in which decision makers do not take accurate account of all the costs as well as all the benefits of each activity."

No doubt some significant negative externalities have existed and some governmental interventions have been motivated by a desire to rectify baneful conditions. Public health regulations furnish the most compelling examples. Contagious diseases undoubtedly generate external costs: historically they caused tremendous harm; and government's public health regulations were generally framed and enforced to bring about a more efficient condition. In recent decades, antipollution laws and enforcement bureaus such as the Environmental Protection Agency provide examples of the governmental attack on negative externalities, though the framing and enforcement of the environmental regulations raise many questions about their exact intent and about their success when all costs and benefits are taken into account.