2. The Economic Role of the State

2 The Economic Role of the State GEORGE J. STIGLER The proper role of the state in economic life is that which makes for the best attainable society of men. This statement has the pleasing property of reflecting accurately the views of both Thomas Jefferson and Karl Marx. It also has the more disturbing property of forcibly reminding one that there is no such thing as an economic theory of the role of the state in economic life that only if the nature of the society of men one s.trives for is specified can one proceed to an economic or, for that matter, political analysis of the state in economic life. Yet societies, at least democratic societies, do not have an explicit and coherent blueprint of the proper role of the state. Such blueprints are made only by the more ambitious political philosophers, and they never describe faithfully the ruling beliefs of any real society. To read the unwritten popular consensus, one must look at the past trends, the present status, and the momentum of actual policies of the state in dealing with eco nomic affairs.

The direction of public policy is clear even to those who like it: the role of the state in economic life has expanded on a thousand fronts and contracted on none worthy of mention. Direct, if incomplete,. measures such as the share of national income spent by governments or the ~hare of the labor force employed by governments are unequivocal on this score.l The 12 The Economic Role of the State 13 dense network of public controls over private economic activity is much more difficult to quantify, but no one can doubt its tendency to increase in scope and detail. Why has this expansion occurred? There are a series of traditional answers, and I propose to examine them critically. Each answer will be subjected to the test: Was it a genuine historical force in bringing about an expansion of the state's activity? By a "genuine historical force" I mean one that was causally valid, even though in some deeper sense it might be false. To illustrate: Suppose a community abandoned a fertile valley because it feared repeated floods. This explanation could be valid even though it would have been more economical to build a dam (or even if there never was a flood). The separate question whether the forces that historically led to an enlarged economic role for the state should have had this effect will also be discussed.

1. The Growth of Wealth A first explanation for the expansion of the state is essen tially an application of the theory of consumer demand: as a community becomes wealthier, it consumes relatively more gov ernmental services just as it consumes relatively more medical services and good food. The richer the society, the more it wishes of public education, of highways; the more it needs of national defense. Adolph Wagner went so far as to enunciate this tendency as a "law" of increasing state activity. But neither he nor subsequent writers have transformed it from a naked historical description into a substantive generalization. They have not shown that the economic functions that are intrinsically (most efficiently?) con ducted by the state have a larger comparative role in a richer society, nor-what we shall consider later-that economic prog ress creates vast new political duties. Comparative studies yield no support for the view that there is a simple, positive association between the wealth of nations and their control over economic life. Many rich nations such as 14 The New Argument in Economics the United States,Canada, and Germany exercise a lesser role in economic life than many poorer nations such as Italy, Norway, and India. 2 In modern times the role of the state has generally expanded within a nation as its income has grown; but this association has not been characteristic of earlier times (for example, state control diminished in England and the United States from 1650 to 1825).

In any event, coincidence is not causation, and no one has presented a logical connection between greater wealth and in creased political control. On the contrary, the natural expectation has been that a wealthier, better educated citizenry would have less need for political intervention in economic life. Let me give two examples. The provision of public education has been one of the largest peacetime functions of government, and we can accept as in disputable the fact that a richer community wishes longer and more elaborate formal education for its children. But one would expect that richer persons would prefer education tailored to their tastes, not the relatively uniform instruction which our state boards of education prescribe. Budget studies indicate that a larger fraction of children of well-to-do families than of poorer families go to private colleges, and one would expect this tendency to extend through lower levels. One might expect the economics of scale to dictate public education in a sparsely settled rural region, but in the densely populated urban centers of today any cost advantages of public over private education must be trifling at best.

Again, we naturally expect the richer community to insist upon more generous care of the ill and the aged than a poorer com munity could afford, but we would also expect the typical citizen to be increasingly more competent to take precautions against such actuarially foreseeable events if the distribution of income has not become notably more unequal. If one assumed, as this literature often does, that only after a given absolute income is exceeded can a family save for future emergencies, then, with rising incomes, relatively more families can afford to The Economic Role of the State 15 save. Unless the population is steadily becoming more myopic in affairs economic, a rising fraction should be able to care for themselves. 2. The Advancing Technology of Government A second explanation is that advances in the technology of political organization have made state control of economic ac tivity feasible and efficient. The main advances that have been cited are the development of a professional civil service; sta tistical and accounting techniques that yield prompt and com prehensive information permitting effective central control over economic activities; and the emergence of a ubiquitous and rapid communications network. Just as scientific advances have made air flights and air conditioning possible, so they are believed to have made detailed and continuous supervision of economic life possible.

Of course this is an explanation of the growth of political control only in the sense of being a permissive factor, which released other forces previously lacking implementation. 3 Even within this severe limitation, it is an explanation that seems more relevant to the centralization of political control than to its expansion, for it argues chiefly that the optimum size of all en terprises has increased. The improvement of political technology is presumably at tested by the fact that political controls have become more efficient and in some sense more successful. And this claim of success in turn seems to derive support primarily from the observation that the economic role of the state has expanded without immediately disastrous consequences. The state controls the airlines, and planes have increased in speed and safety. The state inspects the kitchens in restaurants, and people are living longer. The state· supervises the Indians, and scalping has dropped off.

There is a remarkable absence of criteria of efficiency or success of governmental controls. The absence of criteria is shown by 16 The New Argument in Economics the fact that the folklore says that state activity X was successful or unsuccessful-as if the outcome of a complex undertaking can be described by 0 or 1. There is ample argument on what the state should do, but very little precise information on what it has done. How different is the American transportation system because of the ICC? When did the regulatory system codify existing practices? When were its goals achieved, and when were they adapted to the state of affairs? Similar questions can be asked, but have not been answered, with respect to a hundred more instances of public control. I am skeptical of the importance of advances in political technology in general, but in one task-the raising of tax revenues-the state has benefited greatly from the general cen tralization of economic activity in modern corporate enterprise.

It is extremely doubtful that thirty per cent of the income of a community organized in small proprietorships (including family farm enterprises) can be taken in taxes, especially in peacetime. The financial records (which first came into general use as instru ments of controls for larger enterprises) would be too poor to sup port the collection of heavy income taxes, and excises of a magnitude necessary to yield such revenues would simply be uncollectible. It is, in fact, notorious that even today the small proprietors are somewhat negligent taxpayers. 3. The Increasing Complexity of Social Life A third basis for state action that is often proposed is the increasing interdependence of citizens in a complex urban civ ilization. A larger share of the effects of an individual's actions are believed to fall on others than in olden days. A drunken cowboy was a danger chiefly to himself, and perhaps to his sponsor; a drunken driver may kill innocent strangers. A dis gruntled farmer will starve if he does not work; a disgruntled labor union may bring the economy to its knees.

I am not certain what interdependence actually means here. If it means that increasing specialization narrows the range of self sufficiency of an individual or family, then one must agree that The Economic Role of the State 17 interdependence has increased. But specialization does not neces sarily call for larger state activity; after all, the market is the prime center for the co-ordination of specialists. As the allusion to labor unions suggests, sometimes this inter dependence refers to the possession of monopoly power sufficient to wreck the economy. Aside from the inconvenient fact that the power of labor unions is largely a product of deliberate govern mental policy, it seems sufficient to make two comments. The first and minor comment is that only the unions exercise the power of withdrawal from production; no entrepreneurial mon opolist, however greedy and powerful, would want to do so.

The second, important point is that the growth of state economic activity agrees neither in time nor in locus with the control of powerful monopolies. There was some relationship between fear of monopoly and federal regulatory activity at the end of the last century, but in recent times the most important regulatory programs, such as those in housing, agriculture, motor trucking, financial markets, and the like, have essentially no relevance to questions of monopoly. Often the doctrine of interdependence seems to be a sort of generalization of the doctrine of ·external economies and dis economies. On this version, it is held to be a characteristic of modern times that a larger proportion of the effects of an individual's acts falls upon others. And this in tum seems most often to be attributed to the increased proximity of individuals: the smoke from the chimney-that Gibraltar of external dis economies-falls on more people.

This is largely an empirical quesion, and again it is one to which little systematic analysis has been devoted. There is surely more need to regulate vehicular traffic, but not obviously more need to regulate education or housing or agriculture. There is, more need to compel the use of fire-resistant building materials, but not to regulate labor markets, security markets, or the professions. . But this question of interdependence raises also another: Can we not, with our increasing incomes, afford individually to pro tect ourselves from our social as well as our physical environment?

18 The New Argument in Economics Privacy is also a producible commodity. In fact we do produce it, and the vast increase in the individual's mobility has become a major resource in choosing his social environment. The major migration from the central city to the suburbs that is now taking place is one vivid instance of this increasing power of the individual to choose his environment. The privilege of ec centricity for which John Stuart Mill pleaded is in many respects more widely enjoyed now than ever before in our history. 4. The Incompetence of the Individual The final explanation of the expansion of the state is that the individual, whether a consumer, laborer, investor, or what, is incompetent to conduct his affairs properly. This explanation is, of course, related to the foregoing arguments that scientific and economic advances have made social life more complex, but I believe that it goes well beyond this.

The decline of confidence in the competence of the individual has in fact been the basic reason for the vast extension of the state's regulatory activities. States license teachers· because local school boards would be incompetent to hire good teachers. The FTC compels the labeling of fabrics because the consumer could not detect substitutions of inferior goods. The individual is compelled to pay Social Security taxes because he would not or could not make provision for his personal security . Airline pilots are certified by the CAB because the airlines would not insist upon well-qualified pilots. Elevators are inspected because owners of apartment and office buildings would let them become dangerous. Stock prospectuses must be approved by the SEC, for investors would be susceptible to fraudulent claims. And so it goes. This decline in faith in the individual lurks behind the great majority of public controls. Let the reader ask of any such control: Is it necessary if men are informed and in comfortable economic circumstances? If the answer is no, the control assumes incompetence.

The Economic Role of the State 19 It might appear paradoxical that during a century in which average incomes have risen at least fourfold and formal education now takes up more than twelve years of the average man's life, his economic and intellectual competence has been steadily denigrated. If all this education does not equip him for life, and if all this incoIlle will not give hiIll the. power to care for himself, how could he possibly have survived in earlier days without the assistance of ubiquitous governmental guardians? One answer is that the world has become much more complex and makes demands for specialized knowledge that was not needed in earlier days. Anyone can judge the competence of a stagecoach driver, but not of a pilot; anyone can tell bad potatoes, but not the existence of cancer-inducing sprays on cranberries. There is an element of truth in this answer, but it is a tiny element. People are just as able to predict old age, or the benefits of education, as they ever were; they are just as able to judge the cleanliness of the kitchen in the inn, or the reliability of an advertisement, as they ever were.

The real answer to the paradox is that we are no longer satisfied with the level of performance of the average individual. He may be better informed, and he is certainly richer, than his grandfather, but he is not so well informed as that reformer down the street. This average man crowds into a Boston night club and is burned to death; so we must regulate night club capacity and exits. He buys stocks from Samuel Insull; -so we must control the Insulls. He lost a hand in a sawmill; so we shall compel sawmills to have guards on their saws. What was good enough for his grandfather-who lost three fingers to a saw and a year's income to a swindler-is not good enough for him. I hope I have chosen highly plausible cases of the need for state regulation, because I wish to emphasize how persuasive this kind of consideration has been in almost every area of state control of economic life. The public as a whole has been educated or brainwashed--or should one use the more neutral 20 The New Argument in Economics word, persuaded?-to believe that there are many more serious problems than our ancestors recognized, and that at least a significant fraction of the population cannot individually cope with them in a manner that society should demand.

Since there is no absolute standard of competence, there is no limit to the possible scope of this extension of public controls. I t is at least as difficult for an ordinary person to tell whether his television set is properly constructed as it is to tell whether the surgeon is skillful; so why not regulate the production of television sets? It is at least as difficult for this person to judge which universities offer satisfactory training for a Ph.D. in economics as it is to judge whether a house has been built properly; so why not regulate the granting of advanced degrees? It is all too evident that by a proper use of statistics-and what is proper in the area of public opinion and policy differs remark ably from what is proper in a college course in statistics-one can continuously enlarge the area of individual incompetence. What is not so evident to many is that the same philosophy and technique lends itself to areas other than economic life, and in particular to politics.

An individual who cannot choose a barber still chooses his Congressman, a choice many would have deemed more difficult. (Why then has there been a secular improvement in refrigerators, which we are told we cannot judge, but not in aldermen?) An individual who cannot understand the cost of installment credit when he buys an automobile (or so certain probable legislation assumes) is quite able to judge the costs and returns of the foreign-aid program, the farm program, and the highway pro gram. An antidemocratic element is clearly immanent in the position of the critics of individual competence. If we accept, as I do, the increasing distrust of the individual as the primary source of the growth of the state's control of economic and social life, we still face the questions: Is the distrust justified, and is the remedy of public control appropriate? In a sense, the distrust of the individual is always justifiable.

If we merely pose, as public policy has posed, the question: Do The Economic Role of the State 21 some people act foolishly or blindly in any area?-the answer will always be, "of course." Whatever standard of wise behavior we accept, some people will fail to meet it. Someone will always starve amidst plenty, maltreat children out of thoughtlessness or sadism, buy fraudulent wares, etc. And since the standard of wise conduct is both arbitrary and flexible upward, this will always be true. The magnitude of the shortcomings of individuals, however, cannot be ascertained so simply. Would a large number of parents fail to send their children to school in the absence of compulsory school laws? The proponents of such legislation assert this to be the case, but they offer no evidence. 4 Would city land-use patterns be chaotic (whatever that means) in the absence of zoning? It is so asserted, but the evidence has not been published. The history of reform rests much more upon shock ingly reported episodes than upon documented failures of nu merous individuals.

Nor, in the reckoning, is any attention paid to possible short comings of the state in seeking to remedy the deficiencies of some individuals. These shortcomings may be illustrated by one state activity: the licensing of teachers. Local citizens and their school boards were deeIned incapable of choosing competent teachers; so state licenses must be obtained. The states have largely elim inated the ability of local school boards to hire untrained teachers or nephews of school board members, but only at real cost: -The impOSItiOn of a set of course requirements that have the' effect of reducing the competence of teachers. -The exclusion of a large number of highly qualified teachers (the liberal arts graduates). -The imposition of tenure systems that make it virtually impossible to discharge incompetent teachers. There is no need to reach here a decision on whether the state's control of teachers has led to a net improvement or deterioration 22 The New Argument in Economics of education; the point is that deficiencies are at least as inherent in the political process as in the behavior of individuals that it seeks to remedy.

The matter does not rest only on a reckoning of private and public shortcomings in the performance of certain activities, but also on a deeper ethical question. Let the control of (say) housing by the state lead to housing that is superior to what the individual would obtain. Is there no value in the free ex pression of man's imperfect judgment? Are not the trials and errors of a man valuable things in themselves?' Good things, in short, are never free: unless one is willing to pay a price in terms of individual failures, there is no pos sibility of maintaining the dignity of the individual. Crucial traits such as self-reliance, prudence, tenacity of purpose are not to be achieved in a society where independence of action and fallibility of judgment are forbidden by law. There can be no successes where there are no failures. It is a remarkable and a depressing fact that the vast expansion of the economic activities of the state has not been based upon rational analysis. If a fault was found with individual action, it was not necessary to demonstrate that the fault was serious or frequent. If it was proposed to eliminate the fault by state action, voluntary methods (which present information but allow freedom of action) were usually ignored and certainly seldom analyzed to see if they were sufficient. When compulsory methods were invoked, their costs were seldom realized and never measured.

Perhaps political life is inherently irrational, and only a form of social psychiatry can illuminate its course. But to the extent that it is rational, it has been a poor piece of rationality, and for this economists share some of the blame. The opposition of Adam Smith to state economic enterprise was based upon a vast history of failure. A century later the opposition had become traditional: there was no extensive history of public economic activity to criticize, and the criticisms became doctrinaire and unpersuasive.

The Economic Role of the State 23 The main task of the liberal is to restore to vitality the critical analysis of economic problems and their comparative administra tion by individuals and the state. To identify social action with public interest is as stupid as to believe that all change is for the worse. Only by hard, rigorous analysis of concrete problems and solutions can we raise public opinion and there fore public policy to a responsible level. NOTES 1. See) for example, S. Fabricant, The Trend of Government Activity iTl the United States since 1900 (1952), M. Abramovitz (with V. Eliasberg), The Growth of Public Employment in Great Britain (1957), and A. T. Peacock and J. Wiseman, The Growth of Public Expenditure in the United Kingdom (1961). 2. The Economic Survey of Europe in 1959 (Economic Commission for Europe, 1960) presents data on per capita income and governmental expenditures as a share of national income in eighteen countries (op.

cit.) chap. V, p. 5. The relationship between the two is weak; the rank correlation coefficient is .38. The inclusion of the regulatory activities of government, if a measure could be devised, would probably serve to diminish this relationship. 3. The advances in organization and communication that have made cer· tain kinds of state control feasible-for example, daily supervision of the capital markets-have, in general, had similar effects in the private sector that have reduced the need for state activity. The individual investor's access to information relevant to the security markets, for example, has also benefited from the same advances. 4. Actually the evidence is that these laws have had little effect; see my Employment and Compensation in Education) Appendix D.