 Good morning ladies and gentlemen. It's a pleasure for me to To be a professor for a little while. I Wouldn't want to overdo it. I Used to be a professor, but a number of years have elapsed since then and so this is a challenge for me to come into a classroom twice a day and present an organized Talk, but I'll do my best and maybe some of my Rusty pedagogical skills will will Work a little better as we go along. I hope so Today I want to Present some Background material as it were not so much actual historical material Which I'll be working with for the rest of the week Although I will make references from time to time to historical events, but I want to give us some ways of thinking that I have found helpful in trying to understand the growth of government in American history and So some of this is more analytical than it is historical But I hope it will prove to be helpful before I begin even that I want to Refer to some of the reading material that was recommended my book crisis in Leviathan was I think Recommended to you as good background reading and and you won't be surprised if you find me this week repeating some of What I I wrote in this book Unfortunately, I haven't learned everything new Since I I wrote this book. I wouldn't write it the same way today if I had it to do again, but Most of the most of the things I would rework or in the early chapters rather than the The meat of the book in the historical chapter So for the most part I stand by the historical analysis that appears in crisis in Leviathan When I wrote crisis in Leviathan about the only book that took a broad view of the growth of American government was a JRT Hughes book the governmental habit and That was a useful book and it's still worthwhile for you to read. So I recommend it although Jonathan who was a dear friend of mine was not a very systematic thinker and so what you look for when you read his book is Is nuggets of insight and interesting facts and there are many of them in his work And that's what makes it worthwhile but Jonathan was not a man given to to developing a coherent theory or structure To encapsulate his interpretations and the work suffers as a result Just recently two books that also take in a lot of territory have been published Some of you are aware of them, but just in case you're not I want to call them to your attention One of them is Randy Holcomb's book from Liberty to democracy Professor Holcomb is is well known to friends of the Mises Institute because he he often comes here for for talks and conventions and other occasions and this book covers the whole time period from the colonial era of British North America up to the present day and carries a theme that In the beginning at least from the time of the Revolution and the Constitution There was a great emphasis placed by Americans on using government to secure Liberty and democracy on the other hand was something that was not held in great esteem and was viewed as a As an a useful and legitimate means to an end, but the end was the securing of Liberty And Holcomb argues that over the past 200 years the inexorable trend has been away from that initial stance and toward the idea that the securing of Liberty was relatively unimportant and the Giving sway to more and more democracy was held in ever higher esteem and as a result government has has grown bigger and bigger This book is a nice compliment to my book crisis in Leviathan because whereas I Covered the period from the late 19th century to the to the late 20th century and focused on National emergency periods, which I think played an especially important part in the course of events Holcomb tends to not only take in a longer period, but to concentrate on on as it were non-emergency periods and events and so his book along with mine, I think Cover much of the ground that that one would want to learn about in Trying to understand the growth of government in the United States another book I highly recommend by Charlotte twight Is is called dependent on DC and the subtitle is the rise of federal control over the lives of ordinary Americans Charlotte Was a PhD student of mine if if I may say so Back in the days when I was a professor at the University of Washington And I'm a little hesitant to describe Charlotte that way because She was a student who required no oversight I love those kinds of students She she knew what she wanted to do and how to do it and she really didn't require much help from me And although I tried to be helpful when she wrote her dissertation. I don't think she needed me But I was still pleased to be associated with her her work And she became a dear friend of mine, and she and I have have worked together over the years On research of our own we've we've done some writing Especially back in the 1980s when she was first starting as a professor But Charlotte's book is beautifully researched. She's a extremely solid researcher always gets her facts Absolutely straight and documents them In the in the slightest detail, so I think some of us suffer from from going off half-cocked sometimes and making factual claims that really aren't well Documented but Charlotte is not such a researcher Her book basically covers the various federal programs from the the 1930s to the present and covers some ground that is normally not covered in Discussions of the growth of government such as the growth of the surveillance state Which has become more and more important especially in the last couple of years But has been something that's been developing for a long time And so I highly recommend her book for the more recent Period of the growth of government and especially for programs like federal involvement in education and social security Where as the subtitle suggests ordinary people have become more and more dependent On the federal government to provide them with with critical benefits that they used to provide through private means So those are good background sources and And I'm sure that I haven't yet absorbed everything that is in them And that I'll be going back to them from time to time Let me say just a few words about History in general If you were here last week to hear Ralph Raco, you you probably don't need this But at all events This is the Mises Institute which is dedicated to advancing the work of Mises and Rothbard and and others who work in that tradition and That is fundamentally tradition in in economic theory or more Basic than that even in the theory of human action in praxeology I Don't know if it was Mises himself or one of his followers who is supposed to have said that Everything you need to know you can know by sitting in an armchair with your eyes closed And that's one way to to conceptualize the character of praxeology that praxeology is the logic of action and once you start thinking about the idea of purpose of Goal-seeking human behavior then then you can sit there with your eyes closed and and think of implications of that Throw in some reasonable factual Auxiliary statements and then see what they along with the Axiom of human action imply and you can spin out an enormous multitude of implications that way and build a whole structure and To a large extent that's what Mises did in his great work human action and Others have followed and developed new implications over the years So so one might say well if we can know everything by by sitting in a chair with our eyes closed Why do all this hard work of learning history? That that requires that we open our eyes That we are doing it a great deal of reading and Wrestling with facts and trying to sort out alternative interpretations of specific events It's a very different enterprise from sitting with our arm with our eyes closed to thinking It's not necessarily Easier or harder. It's just very different Well, I think Mises himself anticipated that kind of question And it's interesting It's always been interesting to me that that Mises devoted so much of his own intellectual energies to actually doing history Mises was I think a great historian and many of his works display his his skills and Wisdom as a historian a lot of judgment goes into historical Interpretation and that's where many historians go astray and because they they're not good at making sound judgments But Mises I believe was was an extremely good judge when he interpreted historical events and Some of his works such as nation-state and economy are to my way of thinking splendid works of historical scholarship similarly Murray Rothbard devoted much of his energy to historical scholarship and I Think I'm willing to say that nobody knew more facts than Murray Probably no human being ever read more books and remembered what he read it was Amazing what the man could call forth with with with almost no prompting at all Actually wrote it in a memoir after Murray died to how he he wrote a letter to me one time after I had Drafted my book crisis in Leviathan. It was being circulated to scholars and Murray turned out to be one of those persons and He responded by writing a letter which was what was basically to me although it was sent to through the Pacific Research Institute, which was sponsoring my book And passed along to me, but this was a 20-page single-spaced letter which consisted basically of Recommendations for reading He would say well professor Higgs has slumbered at this point He needs to see and then he would have some reference to the Southwestern Tennessee Academy of Religious and Praxeological Studies Where I could have found the article by Joe Schmoe on on something I never heard of so Murray was an extraordinary historian and I Don't think any of us can really expect to to equal him in that regard because it requires some genetic equipment that I suspect the rest of us are lacking but But at all events he also did a lot of hard work even with the skills He brought to the endeavor to to to learn history and he absorbed a huge amount of it and wrote a great deal of interpretive historical work and it's a Besides being educational, it's great fun because Murray was a sprightly writer if anything We hear every day on the news and When you read the newspapers various people engaged in politics making policy proposals and If you think about it, I believe you'll find that policy proposals invariably rest on some assumptions about how the world works Some of them are what we might call praxeological assumptions It's remarkable how many policy seemed to rest on Misunderstanding the law of demand for example thinking little things like that, but very often they're a little more complicated and basically make assumptions about about How people will respond to various stimuli for example a few months back Paul Wolfowitz told us that as soon as that as soon as American forces entered Iraq the Iraqis would come forth waving and throwing flowers and celebrate us for liberating them Well, the mr. Wolfowitz was making a judgment about how the world works Assuming he was not being disingenuous in making that forecast He believed that there was a certain relationship between some fairly complex events And on the basis of his understanding of how these events are interrelated in concrete reality He made a forecast about what would happen if something was changed If the government of Iraq was replaced by American military forces Well now we see I believe that he was wrong that in fact There wasn't a lot of throwing of flowers on American troops and indeed Rocket-propelled grenades are closer to to the mark and they're being thrown daily now at these unfortunate American soldiers who put themselves in harm's way and are discovering How people feel about it, but all policy Proposals rest on judgments and understandings about how the world works. Where do these judgments come from? Well, they come from people's understanding of history People say We can't do such and such because we know from what happened at Munich in 1938 that if we let that happen the next thing, you know Saddam Hussein's forces will be rolling into Czechoslovakia and then into the Bronx in Brooklyn so People make judgments and sometimes these particular historical events like that one I just mentioned the Munich analogy turned out to loom Extraordinarily large in a lot of people's thinking Much of American foreign policy seems premised on an understanding that the Munich analogy applies generally always and everywhere and That may be an unsound interpretation of history So a good understanding of history might help us to be better judges of policy proposals History is among other things what you might call the laboratory of social science We don't have to have a laboratory to test our praxeological knowledge as Mises said We can we can get that straight by sitting in the chair with the eyes closed We know what purpose of action is because we are all engaged in it ourselves as human beings and we can use logic to to arrive at some implications of human action, but But for more complex events and how they are interrelated in the world. We can't just rely on praxeological understanding we have to add what Mises called the thymology and thymological understanding is is the kind that combines our praxeological understanding with Our knowledge of what people are actually trying to do what do they Know what did they believe? What are they trying to achieve? What do they regard as good means for the attainment of the ends they've selected? These things are not given in general they vary according to time and place and For that reason a history is the only place we can go to find out the specifics Even praxeological knowledge doesn't tell us Magnitudes it's one thing to say the law of demand applies So we believe that if a price is higher than other things being equal people want to consume less of the good But how much less only history tells us about the magnitudes So history is where social scientists have to go to to put empirical meat on the praxeological bones of their understanding a Lot of Philosophers of history and historians have believed over the centuries that we could arrive at laws of history just as Say physicists have arrived at laws of physics laws of nature We know that in a vacuum Objects fall at 32 feet per second per second And that's a that's a law. We believe that applies to any object in any vacuum whatsoever. It's a general law and people have dreamed people such as Karl Marx that they could somehow divine the laws of history the kind of rate of acceleration of Capitalism as it were and what it was going to become at some future time and why What Mises taught In various places including his wonderful book theory and history was that there are no laws of history and there can't be Because laws of history would contradict the whole idea of human action The idea that people are free to make choices that they're not predetermined But nothing ever requires any individual to choose a particular choice in a given situation People learn they acquire new tastes new objectives. They discover new means to achieve their They're given objectives. They're constantly changing Every day you live you you step as it were into a new river It's never the same again because you're never the same again You become a new human being every day, although there's a certain core of continuity. We hope so There can't be any laws of history and some what might say if there can't be laws of history What's the point? Why are you doing all this hard work of historical research if you're not going to arrive at some kind of generalized? knowledge some kind of statement about how the world works in in time and the answer is that Even if we can't have laws of history that we can discover some pretty good patterns and Some pretty reliable regularities That doesn't mean they're sure fire That doesn't mean we can be absolutely certain that they'll happen and precisely the way that they've happened in history But we don't have any choice as human beings about making bets Whether we're making Interpretive bets as scholars about why things happened as they did or whether we're making bets as ordinary human beings going through life In a perfectly routine way we all rely on things hanging together in a certain way in order to take the next step If we couldn't have some kind of reliance then then we'd go mad But we we ordinarily Develled those kinds of Confidences We know that certain things are our good bets And we rely on them and we succeed as a result in achieving the ends we we seek And it's that way with the study of history, too We can't be absolutely certain that any of the regularities and patterns we discover Are first of all correct necessarily there's always judgment involved there and we can't We can't be absolutely certain that they're going to recur But We can have a degree of confidence we can make a bet Now many historians talk As a shorthand it if in no other way as if society Did things and I just want to caution us as we go forward that that even I may sometimes refer to To things that people in general believed or did as If society were an actor but this can never be more than a shorthand a way of Compressing our discourse Because we know we know from our understanding of human action and praxeology that only individuals are capable of taking Purposeive actions society is an abstraction It's a concept It's not an acting entity and so We we need to be alert to historical judgments that that Are expressed in the form of society needing something and therefore doing something society deciding on such and such Historical writing is rampant with this kind of sloppy language And I think it very often reflects sloppy thinking sad to say Doesn't mean that the individual actors in history are Adams This is an old canard that Anti-libertarians often throw at libertarians that you you assume everybody's an island An atom that everybody's on his own And what a preposterous idea well indeed it is a preposterous idea because we all live in society and We're all influenced by our location in that society by our interactions with other people That's how we acquire our beliefs our knowledge our understandings of the social world and all the rest of it So we're not Adams, and we're never going to be But that doesn't mean that some abstractions such as society as an actor Ultimately all the actions are still being taken by individuals no matter how embedded they are in a social context so when we think of of Ideas for example, and we're going to be talking a good deal about the role of ideas in history the rest of the week These are ideas held in individual minds And they have something to do with the social reality in which the the individuals Exists and hold those ideas And in turn when individuals express themselves and take actions they alter to some extent The social reality they are a part of so there's a constant reciprocal relationship between individuals and their ideas and the social reality that they In a sense Emerge from and in turn help to recreate so there's a constant going back and forth Some historians have tried to argue almost as if ideas were the deciding force and Determining the course of history others that know it's just social reality. It's just big forces. It's things like industrialization or urbanization Individuals just react. They don't have anything to do. It doesn't matter what they think. Well, these these views are both wrong Because in fact to both both kinds of changes are taking place And out of their interplay comes historical change Well, we're going to be talking this week about a particular form of historical change the so-called growth of government in in just a the United States and the area that That was the British North American colonies before it became the United States of America So this is a little little slice of historical space But it's but it's big enough For me at least there's there's a lot to be learned here Let's start off by clarifying what we mean by the size of government and Therefore how we can talk about the growth of government. This is this is not an easy thing to do right at the outset There have been many studies Particularly in the past 30 years of the growth of government economists became very interested for a while And then political scientists that got involved and others joined the the hunt to try to explain the growth of government and Modern social science being what it is in the mainstream this quickly became a Gigantic econometrics exercise in which you know my econometrics was cleverer than yours Make their Reputations in the mainstream profession And so unfortunately although These studies actually got off to some promising begins They tended to to go astray in various ways because they turned into the usual mishmash a swamp of econometric quarreling And along the way the analysts tended to lose sight of what the hell they were supposed to be understanding and So we need to recall unlike these econometricians that there is no one single way to measure The size of government that most of them seized upon government spending as a proportion of gross domestic product and that was The size of government and that became a measurable dependent variable to do the econometrics and in some cases they they used alternative measures such as Government revenues relative to gross domestic product In a few cases they looked at employment and they looked at government employment relative to total employment or total labor force Now you notice that whenever they've they've tried to measure the growth of government. They've almost always Used some relative measure that is to say they've standardized what government is doing how much it spends or taxes or employs relative to some broader measure such as total domestic product or Total employment This this this right away in a sense Begs the question because if for example you had a growing economy such as such as the modern Western economy So which tend to grow it at around two to four percent a year in terms of GDP? Routinely and government grew at the same rate Then according to these relative measures, there would be no growth of government You know if you had three percent growth of GDP and three percent growth of government Then then into 26 years later. You'd say government is not grown even though it would be spending twice as much money Now this makes sense to economists because they they think somehow that well government ought to grow implicitly If if the economy is getting bigger well sure governments got to get bigger, too Well, why is it that if General Mills produces more corn flakes? Government has to spend more money That doesn't really make a lot of sense Why is it if if the mom-and-pop shop on the corner hires another kid to serve up serve up? hamburgers that government employment needs to go up These relative measures have built into them a kind of bias against even recognizing the growth of government So that's one shortcoming but the major shortcoming is that government as it takes place in modern societies is so multi-dimensional that None of these measures Can hope to capture Everything that government is doing Yeah, if for example the Supreme Court makes some ruling that Cuts into the security of private property rights Well, government may be spending the same as before May be employing the same as before but it seems to me that that denotes the growth of government if government has in Fact put its decision-making in the place of decision-making by private individuals as property owners and There are any number of ways in which government can substitute Means that are not captured by spending or employment for means that are and we'll miss Those kinds of substitutions if all we do is keep our eyes focused on these simple measures of the size and growth of government So we we cannot trust them The typical device of the econometricians is to say well, I assume They'll say well, I'm not so obtuse as to believe that these capture everything government does But I assume that all the things that aren't captured are Correlated closely with the things that are Well show me That's a nice assumption, but it doesn't have any basis Can we in fact easily find instances in which there's not a close correlation And I believe we can indeed that government is so multi-dimensional that it's very hard to Describe as some kind of simple index that can be quantitatively measured in addition The modern government such as the those in the United States Are multiple entities? We have of course a federal system in this country So we have a central government usually called the federal government and then we have 50 states each with a big government of its own and Within the states we have thousands of counties about 3,000 of them in the country all together Each of them has a government and within the counties there are subunits in some cases their units such as townships That have little government Functions of their own and then we have a hybrid entities like port authorities and drainage districts and On and on and on we have any number of Organizations that are governmental in the sense that they make rules that are mandatory and are backed by force and they impose taxes in the United States in recent years there they're more than 80,000 separate governmental entities operating 80,000 and More than 60,000 of them. I have the power to tax so That's that's a lot of different governments now. It's true that No given individual Thank goodness is subject to every one of them. We might be you know pulled into oblivion by all the competing forces to to get at our our substance But but even though no individual is subject to every one of them Many individuals are subject to a whole bunch of them and So when we talk about the government that in itself is a kind of stylistic compression That begs a whole lot of questions Now again, we might assume and some people do that they're basically all in cahoots We can talk about the government because all these people who are who are Plundering the private sector and living at its expense all agree what they want to do They all want to grow and get more of our money and and exercise more power over us. Well Yes, yes, and no Because very often that they actually find themselves competing with one another We all are familiar for example with how states are always Correling with the federal government about who's going to regulate a certain activity or or who's going to get to tax a certain activity or How the revenue from a tax is going to be divided between the states and Sometimes the local governments and the federal government. So we have this revenue sharing and we have So-called cooperatively administered programs which are rampant in the past 60 years things like the unemployment insurance programs every state has one They adopted them because otherwise the feds were going to keep all three percent of the employment tax but if they adopted a Satisfactory State plan then the federal government would remit 90% of that tax to the states. So Having their arms twisted in that fashion was enough and they they all agreed to have a state unemployment insurance program back in the 1930s, but again subject to federal rules and subject to federal financing and sharing of revenue and so government in the United States is a very complex sometimes conspiratorial sometimes competitive across these different Entities and it just makes life Diabolically complicated for people trying to understand what's going on sometimes Well, suppose just To get us off the ground We consider some of these standard measures of the size of government and look at how they've changed over time so that we can get at least Some point of departure for understanding the magnitudes that are involved Suppose we took this measure of government spending for goods and services as Proportion of gross domestic product that's probably the most common way to measure the size of government That's the measure you can easily get out of the national income and product Accounts data because the government spending for goods and services is is a component of GDP final goods and services if we go back to 1900 say we'd find that Governments at all levels in the United States Spend an amount of money equal to about six percent of GDP to purchase Final goods and services six percent and If we follow that over time it has ups and downs some of the ups are quite big This chart shows just federal spending And not just for final goods and services, but for everything including transfers as you can see in the past back here in the I can also see that there's a That's 1860 it looks like 1880 You see the big peak of spending at the time of the Civil War But then it falls way back down doesn't quite go back to where it had been before the Civil War, of course There's no going back But then a tense trends down for a long time until the next Spire during World War one jumps up again Falls back but not all the way and then there's a another Peak in the early 1930s with the collab basically not because government spent more but because GDP collapsed and government didn't spend less So there's a little peak here And then we have this gigantic peak during World War two when the Whole economy was semi collectivized for a few years But that falls back Not all the way of course And then we have this kind of upward trend here But that's that's the next measure. I was going to tell you about if we went back to 1900 and looked not just at government spending for currently Produced goods and services, but it all spinning. We throw in the transfers pensions and what have you In 1900 that was 7% of GDP Now notice we only added one percentage point when we went from government Purchases of goods and services to all government spending back in 1900 went from 6% to 7% as They're our measure the size of government and that's because government didn't make many transfer payments in 1900 It the bulk of them were at that time it transfers to veterans of the Civil War and And many of them were already dead by 1900. So the payments were actually going to their their survivors their their wives and children and third cousins twice removed and The federal government had made veterans pensions a boondoggle in the late 19th century So it reached the point where even guys who had deserted from the Union Army were awarded pensions for their service in the war If you understand politics you understand that So Transfers in the mouth too much, but if we come up to the present The government spending of all kinds That shark shows just the federal, but if we throw in all kinds we we get to Somewhere between 35 and 40 percent now of GDP Government spending of all sorts relative to GDP So that's a much bigger increase than the first measure gave us about twice as much And that reflects the fact that that since World War two a government Purchases the final goods and services have grown only at about the same rate as GDP But these transfers have grown much faster. And so they they've become the The the giant gorilla that's eating Manhattan and Chicago and Minneapolis and all the rest of the places in this country social security and Medicare Medicaid goes on and on and on the Transfer programs are like the stars of the heavens and of course now we're We're getting even the new one a giant very expensive one for prescription payments that Is going to buy a few votes the politicians think in the next election and and this one You don't need to be a rocket scientist to forecast will be just like Medicare When Medicare was put into effect back in the 1960s they forecasted what it would cost and within about to 12 days The forecast had been falsified and it turned out to be vastly more expensive than Forecasted and it just got worse and worse over time And the same thing will be true of these prescription medicines. In fact the British have already been through this I I Lived in Britain about 30 years ago for a while and discovered that Their national health service had made prescriptions free When it was begun back in the late 1940s and as a result, what do you know? People were were camping out at the pharmacies Demanding medicine for everything they could think of and getting it free and the cost went through the roof and The British finally even the British Decided they couldn't tolerate that and so when I lived there They they're their means of dealing with it was to put a charge on a 50 pence You know half half a pound sterling That had to be paid by the patient when a prescription was filled That was a very nominal charge But the 50 pence charge had resulted in a fallback of something like 50 percent and the number of prescriptions People were demanding at the pharmacies It's very clear that the marginal value people placed on the prescriptions. They were getting before had been very small indeed and That's that's how these things work Government employment back in 1900 was about 4% of all employment Who were these people mostly postal workers? Over half of them were postal workers and most of the others were school teachers Of course people were working for government in all sorts of capacities in 1900 But they just didn't add up to very much compared to total employment 4% When we get to the present, it's about 17% and That's a great understatement Because many of the people who are categorized nowadays as private employees are In fact in every way except formally being on the government payroll government employees Some of them get paid entirely out of federal grants or they work as consultants They work in all kinds of projects such as producing military goods and services Where they're categorized as private, but the only reason they're doing what they do Is because government is paying for it and directing how it will be done so 17% is a gross understatement of actual employment by government now And indeed I have argued that because of the requirements placed on all of us nowadays to Do tax accounting to do regulatory compliance and a host of ways All of these things dictated by government, but without any pay for us to carry out the demands We are in fact all working for government to some extent We're just not even getting paid. We're paying for the privilege Well, let's take a quick look at some of the theories that have been Advanced to explain the growth of government in the United States and elsewhere. I'll be coming back in the next few days to these ideas Repeatedly, so I won't dwell on them right now one of the commonest ideas particularly among historians It's what I call the modernization hypothesis the idea that as economies develop as they industrialize and urbanize and and undergo all the various changes in social and economic structure that are associated with those kinds of broad Events you just have to have more government The idea that you could have horse and buggy government in a modern society is unthinkable to many people including many historians How could you have a government like the one in 1900 where about all the government employees did was deliver the mail and and teach the kids in the public schools in a world with the internet and Satellites and cell phones like Obviously we have to have a lot more government to keep things from flying apart Well This has a lot of appeal to many people and not all of that not all of them in confined in asylums They're They're convinced that it's just unthinkable that you could have a modern economy With a very small government. I look at all the things we wouldn't have I mean no agriculture department. No labor department. No commerce department. No No sec Or Martha would be running a muck She'd be selling stock whenever she wanted to So you can't have this sort of thing things would just blow up You have to have government to see That that the complexities are managed Well, this of course is a preposterous idea Not only is it a bad idea. It's a backwards idea because indeed as many Economists of the Austrian tradition have argued and proudly hyac at greatest length The more complex the socio-economic World becomes the less capable of managing it government becomes We can might be able to imagine a government in a primitive tribal setting With no division of labor to speak of and only a handful of people Where tribal elders could keep an eye on everything and tell people what to do? But once we get far beyond that scale of social life, it's just not conceivable That government officials can know what's going on Understand what's going on and somehow devise a superior way to make things happen It does kinds of beliefs and tell what hi it called the pretense of knowledge Of course modern thinking about government is it's full of the pretense of knowledge It's a pretense. I'll be coming back to it again and again this week But the modernization hypothesis is a corollary of the pretense of knowledge We didn't have to have bigger government because we had big corporations and complex technology anything of the sort Now mainstream economists have put a lot of effort into arguing that we had to have more government because the modernization entailed the Complex of market failures market failures in neoclassical economics have to do with Deviations between the the makeup of the world and the makeup of the blackboard Neoclassical economics has a model it writes on the blackboard of how things would be if they were efficient And we had Pareto optimality every every resource was being used in its most valued alternative Every consumer had adjusted his purchases so that he was in perfect equilibrium And he couldn't make any readjustment that would make him better off No producer could switch methods of production and reduce the cost of production blah blah blah So we write all these conditions on a blackboard and Mathematical equations and we say if we don't have all those kinds of conditions Satisfied in the real world the real world then has market failure well That's sweet. You can do a lot of blackboard work that way But those blackboard models don't have much if any connection with the world we live in They are among other things another exercise in the pretense of knowledge You presume, you know, everybody's demand function for every good you presume You know every producer's production function for every good You presume that the prices are all given to people and they know them and they adjust accordingly Now this is all fantasy world. This has nothing to do with how reality operates nonetheless some of these inefficiencies of things like Spillovers negative externalities that do have the counterparts in reality And so you can say well, maybe there's something there anyhow And say when a when a factory spews smoke out and it spills over under the neighbors and and damages their property Oh, that's a negative externality. It never contracted with them to get their permission for that and therefore This is something that could be repaired conceivably repaired by government action they could Get a court order to stop this pollution or they could they could lay a tax on the activity of the factory or a tax on the amount of emissions that spews forth or various things might be done to alter the situation so that third parties wouldn't be damaged by actions they hadn't agreed to endure Well, okay Life is full of third-party effects. There's no disputing that every day I witness Things that cause me grievous pain the news for example And and if only something could be done to tax the people Who are spewing these things on to me? I would feel better off But we all feel that way In some in some way so If we go back and look at how much of the effort of government over time has taken the form of Programs or actions designed to internalize these harmful externalities How much of it falls under that rubric and the answer is not very much Of all the things that government does Most of it has no plausible connection whatsoever with reigning in harmful externalities none Medicare is not about externalities old-age pensions are not about externalities By military equipment, yeah, that's kind of about externalities but you know we can all hope we won't be the ones spilled on to by the uranium-coated 20 millimeter cannon bullets But This isn't a very good explanation It doesn't even contribute very much to understanding the growth of government to say government has to deal with inefficiencies caused by negative externalities other negative externalities so-called like Like lapses of competition like the fact that we don't have a thousand Producers of homogeneous goods in every industry Well, that's just preposterous since since these are inconceivable conditions in reality to Indite reality for failing to mimic them Make makes no sense whatsoever. The world is full of heterogeneous Goods of goods produced only by a few producers Constantly changing the characteristics of their goods and the terms on which they offer them to consumers Of course these people are Often if not always fiercely competitive in the sense of being rivalrous with one another But they're just not competitive in the blackboard neoclassical economics fashion They're not price takers They're price searchers. They're looking for price terms and other contractual terms that Work best for them Given the constraints on them of consumers and the offers being made by alternative suppliers Public goods are supposed to create market failures. These these goods that have the peculiar quality that Once they're produced, there's no marginal costs associated with anyone's being added to the class of users Some people dispute that public goods exist at all that is some Austrians I Can conceive I think of something that would satisfy the definition of a public good It's usually something like a general rule if government says for example We're going to make make a rule that To coordinate everybody's driving you drive on right-hand side of it of a two-way street That's a general rule. It's public good. It's the same for everybody Presumably well benefit from adopting that rule not that we wouldn't have had the sense to do it without the government making the rule but But nonetheless say if government makes a rule that assists us in coordinating social life And that we can add more drivers and new babies can be born in society and they benefit from the coordination of that True public goods are pretty few and far between The classic example of neoclassical economists is always national defense That's really not a very good example It might have been a better example to the extent for example that that Defense deterred Nuclear attack on the United States deterrence to the extent that it really existed and Resulted from the national defense program Did indeed provide protection for everybody living within the United States and that new people were added Population and joint that protection at no additional cost and so forth. So it's not Not totally far fetched but again how much of the growth of government Can be understood in terms of the provision of public goods that we would all agree are public goods Because the label gets thrown around very freely called education of public good Although it's not doesn't satisfy any of it criteria being a public good they called public health measures public goods although Beyond a certain limit You got to spend more money to provide sewerage service for more people Not like deterred nuclear tax once you build a sewage system in Auburn. It's good for the whole country So this Explanation of the growth of government doesn't cover much ground Even if we agree to cover some now Some people have tried to As it were get a little more politically realistic all these market failure explanations are bad among other things because They involve a black box explanation They say there was an inefficiency boom government group alive What was the incentive of any politician to do anything just because there was inefficiency out there in the world? How did that promote his interest that getting reelected? How did he know there was an inefficiency? These explanations are more like apologies or excuses for growth growth of government and they are good historical Interpretations of why it actually grew recognizing that Problem some analysts that have seized on interest groups and they said well Interest groups tried to use the power of government to promote their purposes and that made government grow Well, yeah, there's no disputing there are a lot of organized groups trying to use the power of government So that is some promise We might wonder why why it was that they didn't get organized until the 20th century Didn't interest interest groups want to use the power of government before the truth is some did So we still have to understand why this became so much more rampant in the past century than it was before him We're back there in the 19th century and government was at least by that measure so small I'll suggest tomorrow Certainly it's much bigger by any measure now than it used to be What's happened to these interest rates? They just wake up and discover that they can use the power of government to promote their their narrow interests Doubted some of the models that have tried to work this in various ways by talking about changes in the voting franchise or Other changes in the costs of taking collective action and some of these models have some interest, but again, they're both boys They don't get us In terms of actually understanding who did what to make government get bigger over time Number of people have had advanced ideology as an explanation And this has been popular People of various political philosophies People as various Mises and Keynes Both believed that it was ideas that had led to the growth of government more than anything else Keynes is often quoted from that famous last chapter of his general theory in which he says that That it's in the end his ideas. It's said that Practicalities are greatly overrated and I suppose as an intellectual himself. He was just trying to To tell the world about how important people like him really were And unfortunately there was more than germ of truth than what he was saying in his particular case, but Hayek and Mises and Keynes all agreed that You can have the development of ideas which lead people to take actions making government grow or shrink And that ideas are powerful ultimately This goes way back. David Sheum told us that all governments depend on public opinion Etienne They love with tea Said that the minute we stopped cow telling to the tyrant you topple Many people have recognized that public opinion It might call the dominant ideology props up whatever it is that government does and if we just didn't actually ask These things couldn't happen so ideology Clearly is it potentially powerful explanatory factor And I don't dismiss it at all I don't think it's the whole story. However, I think it has to be incorporated along with other things that have happened to To make it operate as it has In the past couple of centuries And of course we need to attend to the particulars of the ideology things things like socialism Fascism social democracy these broad bodies of belief systems Have a certain content that operates to make government bigger Whereas alternative ideologies classical liberalism For example, tended to operate to restrain government and you can find it to a limited set of functions Well, finally, there's a head and some and I'm often accused being one of them who blamed the growth of government on crises And again This is an appealing idea because it if one looks at any kind of standard measure to grow the government It does seem that the connection with crisis is not exactly random It does seem to be a perfect match That when there's a great social crisis a big war terrible business depression of modern times In fact government does grow in an extraordinary pace Uh, of course some people don't like to incorporate a crisis in the explanation because they say It's a transitory effect Well, yeah, it grows during crisis because it does all these emergency measures But when the crisis is over, um, then All those crisis measures are given up abandoned laps And what really matters in the eyes of many analysts is It's a kind of underlying force these broad forces that are producing some trend I think that that kind of thinking Reifies the trend it gives that trend a reality That it doesn't possess What makes that trend slow upward? Why is it that it's doing that and would it continue to do that if there never were any crises? Well, I'll argue no It might it might grow a little bit But certainly in the specific course of events that we've seen in the united states in the past 150 years That upward trend has much to do with what happened during the crisis periods And to treat those crises as transitory kind of stochastic events random just blips Forget them. Some analysts even leave the crisis years out of their time series We don't want to contaminate our clean trends adding these abnormal observations I think it's extremely bad historical analysis and in fact historians as such have not been as liable to commit that mistake As the economists and the political scientists who think of themselves as so much more hard-headed and analytical But this is a this is a basic blunder Of interpretation Well, why don't I stop my talking right now and let you ask questions? So we still have about 15 minutes left And what I'm trying to do is just give you a preview of some of the background That is relevant to the specifics that I'll get into in more detail Tuesday through Friday I'm going to speak This afternoon on ideology in particular, so Your comments and questions now, please Yes early he said The current government employment is over 17 percent of global employment. Is that all? uh, government agencies That's all In fact, if you look at federal government, it's just it's very very tiny. It's something like three percent But there's an interesting recent book by a man in lights who works Brookings of all places And uh, and mr. Light is something of an apologist for for for government and government employees But nonetheless, he's written a very interesting book And you can actually find it summarized online some articles In which he's basically juggled the data to find out how many people really work for the federal government via these Relationships as contractors and consultants and recipients of grant funding and what have you And he he was able to pump up federal employment as a few years ago to 17 percent from three In a very plausible way now there's a little bit of double counting because in what light found is something like Three or four of those 17 percentage points are people who look as if they're state and local government employees But in fact, they're being funded by federal money On these cooperatively funded or administered programs of various sorts. And so they're really federal employees Even though they're getting a check written by the state of Alabama Uh, so federal employment is much much bigger than it's Formally reported to be Mark, uh, we mentioned beginning about your book. It's been out about 15 years now and there's been some More recent work. Uh, is there anything in your thoughts about the growth of government changed over that time that they become more pessimistic or optimistic Concerning the growth of government actually I want to respond to that differently because The question of pessimism and optimism Has been raised a lot. In fact, it was raised when the book was first published in 1987 And and many people if you can think back to 87 Some people were still in the thrall of enthusiasm for for reaganism And they actually believed that rival reagan had somehow Changed the course of events and had to turn back the tide of big government blah blah blah I I never believed that myself and I didn't see what happened during the reggae administration as evidence of that at all in fact, I thought that All things considered Even under reagan Government was growing in pretty much the same ways and at pretty much the same rate as before reagan Of course, some particulars are always different and reagan did some good things. He got rid of the price controls on On oil and so forth But you get some bad things too And if we throw everything into the mix it seemed to me nothing fundamental and changed with regard to the growth of government Certainly government spending It's very rapid and reagan taxes went up despite the first tax cut And so forth so and nonetheless Many people were Enthusiastic about reagan to my greatest punishment. Some people still are and they look back The reagan administration is kind of golden age of your anti-government I never understand but my book because it because it Didn't recognize that any fundamental change was being made at the time by that sure reagan Anybody else or that there was any reason to expect a fundamental change Was received by some reviewers as simply an expression of the author's pessimism and A number of reviewers wrote about that Takes as a pest Well, all right I'm a pest Whether I'm a pessimist or a raving optimist what I wanted to The book to be viewed at was an exercise in analysis and history I wanted people to say this is an argument for why government has grown and why We can expect it to go on growing Including as I wrote I believe in the last paragraph of the penultimate paragraph because Someday another great crisis will come And we have every reason to believe that when it does We will have the same kinds of reactions that we had to the preceding crisis And government will shoot up again And we'll be off to the races with all the legacies of that particular national emergency So as long as we have a society with the kind of ideology that ours has Dominant in it and as long as we have The possibility indeed the great likelihood of periodic crises There couldn't possibly be a cessation of the continued growth of government To me, that's an analytical argument. It's not an expression. In fact, Bob Higgs is a pessimist And I think some people are given to wishful thinking I don't be begrudging that I actually envy them Murray Rothbard whom I love dearly was an embedded optimist No matter how horribly the world seemed to be going Murray was always convinced And we're gonna beat the masters Yeah Well, we'll win in the end. Well, we'll come back. We're we're on the right side of other things Well, yes, we're on the right right side In various ways, I believe we're morally on the right side, for example And so I'm not deterred by pessimism or by my analysis when I think about how things are going I would take the positions I take Uh with regard to to my judgments of the rectitude of what government does Regardless of whether government is shrinking expanding or why? But uh What I would hope is that the the analysis would be what people cared for me Now so far as the analysis is concerned Uh, I don't believe I have and I finally answer your question directly. I don't believe I've changed Any of the fundamentals. I I do believe that I have more understanding now Some of the Some of the interpretations and models and theories That have been advanced by others I think I take some of them much less seriously than I did 16 years ago So that it's difficult for me to now you can discuss them with a straight face But I Was trained and I practiced my profession for many years In the context of neoclassical economics and my colleagues there took these ideas series And uh, I took them seriously too because I couldn't just dismiss them I had to have a good basis for dismissing and I think we all should have a good Basis for dismissing is a fool's errand to just say, you know, like somebody's way of thinking therefore the hell with it We need to understand what's wrong But I believe I have a better understanding now. What's wrong with some of the standard hypotheses And so in that sense I I've moved somewhere Buddy Vincent changed In some concrete ways as well We by The end of the Cold War Very fundamental context was changed for the growth of government because the Cold War was a was a very Fecant basis for the maintenance and growth of government Now of course the government didn't just roll over and play dead when the When soviets in a very unmanly way just decided to implode Without even a holocaust or anything Yellow billions But nonetheless, of course the people who benefited from the Cold War and all the things that were tied to it have found new ways and of course the greatest of all recent events is The September 11th attacks Which have been used as the pretext for the mounting of the new permanent war the war on terrorism which I never thought Anything could be better than the Cold War But this actually is because whereas they The soviets could manifestly implode The terrorists can never just disappear Because it's in their very natures Terrorists that we don't know who they are or where they are or what they might be doing So the authorities can Always tell us that they have information and when they tell the public that The public will believe Especially if from time to time a building blows up Or a train runs off its rails or something else happens that can be described as the work of the terrorists I suspect i'll talk about this more on friday But it seems to me remarkable what leverage can be obtained from 3 000 deaths More pedestrians are killed every year in this country Hit by cars while walking road signs And yet 3 000 deaths i'm not minimizing that it is horrible 3 000 deaths has been used as the basis For almost revolutionary changes in the nature of government's relationship to american society and the degree of Penetration into people's day-to-day lives Monitoring everyone's emails Listening to everyone's phone calls for attention Giving up entirely several Elements of the bill of rights such as the fourth fifth and sixth amendments just throwing it off the window willing to If you can get that kind of mileage Out of two buildings being collapsed by airplanes And I think you're in business pretty much for every And I suppose that's a that's a pessimistic outlook, but that's The conclusion that my analysis Leads me to And i'm prepared to be wrong. I hope to god I am But I don't believe today