3. Growth of the "Public Sector" as a By-product of Price-fixing and of Segregating Cost-bearing from Benefit-sharing

3 Growth of the ~~Public Sector" as a By-product of Price-fixing and of SegregatingCost-bearing from Benefit-sharing KARL BRANDT In his Economic Report to the Congress of January 18, 1961, in the preparation of which his Council of Economic Advisers assisted him in accordance with the Employment Act of 1946, the President of the United States stated: In our free economy, economic growth and the improvement of living standards depend not primarily on what government does but mainly on what is done by individuals and groups acting in their private capacities. In this system of shared responsibility, the tempo of eco nomic activity is especially sensitive, for example, to the plans and actions of large firms and powerful labor organizations whose opera tions are national and international in scope. Government makes its basic economic contribution not through the volume of its own expenditures but by promoting conditions favorable to the exercise of individual initiative and private effort. Accordingly, a dominant purpose of government at every level must be the preser vation and invigoration of institutions that favor and support enter prise. In particular, the Federal Government should encroach no more than necessary on the province of private action. Indeed, it 24 Growth of the "Public Sector" 25 should expand as broadly as possible the opportunities for private decision-making; strengthen incentives for businessmen, workers, save:r:s, and investors; and promote a vigorously competitive environ ment in domestic and international markets. l This conception of the role of the state in the nation's eco nomic affairs simply repeated forcefully not only the orientation of the Eisenhower Administration from its very beginning, but also the philosophy pervading the Employment Act of 1946, which the Congress had passed in that year, and which had become law over President Truman's signature.

The government's share in the United States' Gross National Expenditures had expanded most ominously from 10 per cent in 1929 to 27 per cent in 1952. While this share did not decline in 1960, it at least still stood at 27 per cent. 2 Thus, the struggle of eight years to curb the trend toward greater encroachment of the government's expenditures upon the nation's total gross expenditures 4ad not been in vain. Yet there is no guarantee for the years ahead that public expenditures will not again eat more deeply into the national account, i.e., grow at the expense of the privately run part of the national economy which is the basis for the noncoercive society, its freedom, as well as its consumer-oriented allocation of resources and the steady creation of substantive national wealth. The enormously powerful drift toward an accelerated growth of the public "sector" in our times is illustrated by a recent warning of the German economist Dr. Karl Albrecht: From 1955 to 1960, the government of the Federal Republic of Ger many further increased its share in the Gross National Product to 31 per cent. If the social security contributions and the taxes for equalization of war damages are included, the "public hand" in West Germany has taken, in 1960, 42 per cent of the Gross National Product. 3 These German data are particularly instructive because West Germany is internationally considered as having one of the leading private-enterprise economies in the world.

Considering these American and German figures, we may ask 26 The New Argument in Economics whether there is somewhere a limit to the growth of the public sector that divides a private-enterprise economy from a socialist or state capitalist system. Moreover, this poses the even more pertinent question whether a national economy can retain the private-enterprise system once the public sector has reached a certain degree of absorption or control of the social product. Probably this may not be possible without a political revolution or a coup d'etat) because the public sector entrenches itself ever more firmly as larger and larger parts of the electorate, in a democracy, develop a vested interest in a maximum of public services rendered by more and more publicly operated or publicly controlled enterprises. Years ago Colin Clark dealt with the question how high taxa tion must be to be considered as being too high. Where lies the danger point? 4 He cited the French public expenditure in 1922 at a level of 34 per cent of the national income. The concurrent inflation then continued so long that, because of the lag in civil service salaries, by 1926 public expenditures absorbed only little more than 20 per cent of the national income. From 1927 on, prices in France were stabilized. By 1934, French public expendi tures had climbed again to nearly 34 per cent, and another spurt of inflation lasting until 1938 reduced their share to 25 per cent.

Colin Clark argued at length that 25 per cent is the limit of a tolerable proportion and quoted Lord Keynes as having supported his view in 1945, a time when the share in Britain had risen to 42 per cent, from 26 per cent at the beginning of the war. A major traditional approach to containing the expansion of the public sector is to seek control of the budget expenditures of government at the federal, the state, and the local levels. The technicalities of this throttling for the purpose of stricter con trols over expenditures have been the subject of the two Hoover Commissions on Organization of the Executive Branch of the Government and their task forces from 1947 to 1949 and from 1953 to 1955. This is an approach that is at present being ex plored with particular energy in England. 5 It is a method that relies largely on public resistance to high taxes, on the strict control of expenditures through appropriations by the legislaGrowth of the "Public Sector" 27 ture, and on vigilant auditing of the accounts of the executive branch of government. To be effective, this effort must be con tinuous and without relaxation. The greatest impact of this approach will be primarily on the expansionist forces inside the vast bureaucracies of the executive branch of the government itself at all levels-federal, state, and local.

However, efforts at containing the growth of government and its expanding encroachment upon the private economy can succeed only through education of the majority of the electorate about the serious consequences of the continued growth of the public sector. People must be brought to visualize the curtail ment of freedom of the individual and the resulting gradual loss of sources for the creation of wealth in the noncoercive society. Any start toward such an education of the electorate must begin by destroying the popUlar, perfectly Utopian idea that the increase in free public services does not require addi tional tax revenues. This myth rests on the assumption that the operational efficiency of governmental agencies can be im proved, and that the savings thereby achieved will pay for additional services. Real curtailment of public expenditures requires first a restraint in demanding new services. This again requires that people understand the rather complex affairs of the government's budget and its items: (a) transfers and subsidies; (b) goods and social, economic, and environmental services.

Let us now search for the major driving forces behind the drift into the expansion of the share of public expenditures in the social product. What is the motivation of large parts of the electorate for decisions at the ballot box that lead to a dispro portionally larger public sector? What are the economic and political circumstances that lead to the political endorsement of higher taxes and more public employment? Our open society from its beginning felt dedicated to and still adheres to a philosophy of freedom and a system of checks and balances against too much power of the state and its personnel. But in the midst of our society there are many people and groups who have a low or ambivalent appreciation of the private part of the nation's economy. With all sorts of mixed motives, 28 The New Argument in Economics they entertain varying degrees of preference for public enter prises, public employment, and a maximum of public social security services. Of course, not only do these sentiments and motivations differ, but the effective pressure exerted by them also varies greatly. Particularly among intellectuals, much of their indifference to the rising power of the state, at the expense of freedom of the individual, feeds on a basically Marxian or neosocialist criticism of the private economy. They cast the sus picion of dubious morality on the profit motive as an incentive of entrepreneurs; they deplore the distribution of foods of differ en t preference rating and scarcity according to income, the opportunity for monopoly power, and even the freedom of con sumers to express their preferences. Others-particularly among those untrained in or not conversant primarily with economics, such as engineers, architects, natural scientists, anthropologists, sociologists, political scientists, and artists-lack sympathy with the private economy because the free market, with its trial and error, its spontaneity and uncharted mobility, appears to them as disorderly, irrational, and inferior to a more tidy, centrally planned and directed system.

There are still many other critics who share some of the two major types of arguments, but with a different note. They have no sympathy with socialism and endorse private property, but they are critical of free competition and the elimination of the marginal producers under its impact. They lean either toward guildlike arrangements of restraint of competition, or they see in the nonprofit, tax-exempt, cooperative association a morally more valuable, more charitable, or at least more democratic form of enterprise. However, in addition to all these critics of the private econ omy, there are still other people who profess to be the cham pions of free enterprise, loathe socialism in any form, and yet make it easier for all those antagonists who favor expansion of the public sector. I mean those commercial farmers and captains of industry or commerce who are only "in principle" in favor of a free-enterprise market economy. They clamor for protection by the state, or they form organizations or use devices for Growth of the "Public Sector" 29 restraint of competition whenever their own enterprise or type of business faces rough competition, dynamic shifts in tech nology, or dislocations of prices. In their ad hoc efforts, these eclectics frequently select means of state intervention in the market that lead to the worst and most far-reaching distortions in the private sector of the economy. This shortsighted request for state remedies supports the drift into more business activity on the part of the government itself. Inevitably the government becomes a direct competitor with private enterprise and an increasingly powerful factor in allocating additional resources to the public purchase of goods and services. This in turn forces corporations into more lobbying and other political-pressure tactics on behalf of their business.

The enormous expansion of national-defense activities in the age of atomic warfare and giant rockets shifts an extraordinary amount of resources to the government as a partner in contract business. But it is not only the race with nuclear arms, missiles, and space exploration that feeds the public sector. Government support of education and research also tends to favor the public at the expense of the private sector. A·s an illustration of this entry on the part of government into business by nobody's design or desire, but simply as an unin tentional by-product of public correction of the market, we may take a few consequences of agricultural policy. In any econ omy, farming is the kind of work that, as a result of the division of labor, suffers inevitably the greatest proportional, and for prolonged periods even absolute, decline in employment capacity and therefore the greatest geographical and occupational mobility of labor. In the United States the share of agriculture in the employment of the national labor force has fallen from 90 per cen t to less than 10 per cent in a span of 150 years. This shrink age in the proportion of employment in agriculture coincides with economic development, urbanization, and industrialization.

In all countries agriculture, horticulture, forestry, and fisheries represent a sphere within the economy where political attempts to brake dynamic· change and development, to protect a status quo, are most frequent, vehement, and popular. And it is in 30 The New Argument in Economics agriculture where the coercive society-ranging from fascism to communistic state capitalism-is always determined to apply brute force to wipe out private property, private enterprise, and the competitive market. But this is usually only the end of a road previously prepared by state intervention and tampering with the market. In 1928, when the prices of primary materials started their world-wide sharp decline, in Germany the government of the Weimar Republic began to "stabilize" the prices of sugar and bread grain. For sugar, this was done by a compulsory price fixing cartel of the beet-sugar mills; but in the case of wheat and rye a new public grain corporation soon became the dominat ing factor in the domestic and foreign grain trade and the flour milling business. Between 1929 and 1933, the control of the government spread-not by design, but by the necessity of keeping price supports effective-from bread grain to flour and bran, to various feed grains, then step by step to potatoes, fats and oils, milk and dairy products. When Hitler came to power, his government extended the system of price-fixing not only to all remaining agricultural commodities, but rapidly to all food-processing and farm-supply industries. In the center of the completely cartelized business stood large commodity corpo rations of public law, totally controlled and directed by the totalitarian state's agricultural and food agencies.

This gradual destruction of the consumer-oriented market economy with its decentralized adjustments was initiated, in its early stages, by the right-wing conservatives in the parliament and cabinets of the Weimar Republic, with the support of the Social Democrats and the socialistic labor unions. The con. servatives believed the price supports and government stabiliza tion corporations would function merely as a means to pay huge subsidies to large-scale commercial farmers. The Catholic centrist party, which was influential in the coalition governments toward the end of the Weimar Republic, had no special prefer ence for the market economy either and interpreted the Papal Encyclical Quadragesimo Anno to mean endorsement of arrange ments similar to those of the corporate state, with guildlike Growth of the "Public Sector" 31 restriction of competition to· bestow social security on families running medium-sized or small-sized farms. The Social Demo crats and national labor unions, on the other hand, supported government control of agriculture. Their hope was that, via government monopoly corporations and compulsory cartels in farming, eventually nationalization of basic industries and a socialistically controlled world economy could be achieved.

These long-run speculations by believers in the planned econ· omy had certainly helped the drift toward more and more state intervention and a cancerous growth of the public sector. How ever, the crucial act was the betrayal of the free economy by those who believed in the superiority of the private sector but compromised their principles for the sake of expediency. Until 1932, the public sector in Germany grew because the doctoring of all sorts of symptoms of disease by static palliatives happened to have the unexpected and unwanted result of totalitarian control. Of course, once Hitler's National Socialists had assumed governmental powers, the ensuing totalitarian revolution en trenched itself through a centralized economic machine that boosted the public sector. From the moment of gaining power, the National Socialists under Hitler deliberately subjected the entire economy to the dictates of the Fuhrer for his sinister purposes.

In Italy, Spain, and Portugal the corporative state similarly took control of the economy for the protection of agriculture and here too impeded economic development, which would have required competition, freedom of enterprise, and freely respond ing prices. In the United States in 1929" shortly after Germany had started to slide toward the planned economy, the Congress began, under a Republican Administration, to attempt the "stabilization" of the depressed prices of farm products to support the declining cash income of· the farmers. Leading businessmen, such as Mr. Legge, Chairman of the Board of the International Harvester Company, conducted the affairs of the Farm Board until it collapsed and lost its capital. Beginning in 1933, the United States Congress took more massive measures to support farm income by fixing the prices of farm products. This led ·to 32 The New Argument in Economics the formation of the totally government-owned and government operated Commodity Credit Corporation by Executive Order 6340 of October 16, 1933. In 1962, it is still capitalized at $100 million, but has the authority to borrow "not in excess of"

$14.5 billion. It buys the farm crop surpluses (caused by the fixing of the price above its market level) and thus paralyzes the automatic adjustment processes from the supply as well as the demand side. This monstrous public corporation, with its gigantic borrowing authority, by far exceeds the total net income of all private farm enterprises in the United States. In the second half of 1961 it had an "investment" in surplus commodities of about $8 billion. This massive intervention of the government in the market has changed the entire economic climate in the price-sup ported farm-commodity fields-domestically and internationally. It has driven the holding of stocks from private to government hands and has thus socialized the major part of this vast, once entirely private business, at the taxpayers' expense. Without ever asking the American electorate or anybody else whether they were in favor of it, this corporation has social ized the business of holding the huge stocks of wheat, barley, corn, oats, millet, rice, cotton, and tobacco. Nobody in the major food-or feed-processing industries and the export trade has any longer an incentive for holding stocks of price-supported commodities at his expense or at his price risk, because the government pays all charges. Moreover, the risk of changes in prices due to sudden changes in government policy or merely by administrative action is too great to take, even for the largest private corporations. Besides, why should anybody be so foolish as to compete with the government in so costly a business, in which the government socializes the losses? Only public corpora tions can indulge in such folly because, so long as· the legislators stick to the price-fixing farm policy and appropriate the funds, the United States Treasury fills up their capital out of tax revenues no matter how often they lose it. A private company ordinarily does not survive the loss of its capital.

This example of only one government-owned and government operated corporation shows a very substantial replacement by Growth of the "Public Sector" 33 public business of what would otherwise be private business. Amazingly enough, this happened without anybody's consciously pursuing such a goal. The increase in the public sector occurred as a side effect of legislation that did not have any such purpose) but simply chose innocently-we hope-from among a large number of available alternative means of state intervention on behalf of subsidizing farm income, exactly the one that estab· lished a gigantic, monopolistic government agency in business, where it competed with private business and drove out a large part of it. This agency has grown to such an extent that its business of commodity-price stabilization constitutes the third la:rgest item in the federal budget. It represents not only a huge socialistic enclave within the domestic private economy, but dis torts the entire world markets for grain, cotton, and several other commodities. It also offers an example for other countries and groups of countries, for instance, the European Economic Community, to set up similar public enterprises in their farm commodity trade and thus to curb major interests in expansion of foreign trade and investment in deference to the imagined needs of commodity-price stabilization. This sort of government action in the midst of a private economy yields private gains for all the beneficiaries and the socialization of losses. It does not strengthen the private-enterprise economy-as some want to believe-but corrodes and corrupts it.

The Commodity Credit Corporation's surplus stocks of grain have a book value at 30 per cent above the world market price. To sell them would require, however, aside from adjusting the price downward by 30 per cent to the world market level at the expense of the United States Treasury, subsidizing transporta tion to the recipient countries and granting long-term soft currency loans. In many instances the United States Treasury has to pay even for transportation and storage within the re cipient countries. Competent experts estimate that no more than 15-20 per cent of the purchase price can be recovered eventually-in fifteen or twenty or many more years.6 The expansion of this single public corporation over a period of twenty-eight years has accustomed numerous people to wind34 The New Argument in Economics fall benefits. They are harvested year in and year out by acci· dental beneficiaries, not only by the farmers who were intended as the primary beneficiaries. In testing various plans for getting rid of the most gigantic stocks ever piled up in history and abolishing this system with its scandalous waste of economic resources, it has been found that the political resistance against such change would be enormously widespread. There are now too many beneficiaries who were never meant to get any, even indirect subsidies. Grain is a mass of living seeds, containing some moisture, inhaling oxygen and discharging carbon dioxide.

Therefore, it must be moved while in dry storage. Stored grain also loses some weight and declines in quality. Our net surplus stocks amount to two parallel lines of freight trains, filled to the brim with grain, reaching from New York to San Francisco. Those stocks are transported by trucks and railroads at govern ment expense, are stored and rotated, loaded on ships, trans ported overseas, unloaded from ships, and stored again-at the expense of the United States Government most of the wa}', if not all the way. There are endless numbers of trade, banking, insurance, transportation, and other agents occupied with mov ing this surplus, which, from the national and international points of view, is merely a misinvestment and a nuisance. Inevitably all these parties, if they have anything to say about it, will try to stall and prevent any legislative move to stop this absurd waste. We can also expect the large corps of civil servants on the payrolls of the Commodity Credit Corporation in most states of the Union to throw their weight against any plans that would abolish their jobs.

We have seen how a policy with an entirely different purpose ends in a substantial increase in the public sector. Similar case histories can be found in innumerable business arrangements of the armed forces. Our main argument is that a great deal of growth in the public sector is either caused or at least not prevented by the public because it does not have sufficient knowledge and is not being properly informed about these unin tended and detrimental results. It is difficult to bring the full Growth of the upublic Sector U 35 extent of this cancerous growth inside the living body of the free-enterprise system into perspective for analysis because of a general apathy on the part of the American public about farm policies. 7 It is a widely adopted, supposedly progressive and wise attitude of the American public that, when facing the alternative of having certain economic services performed either by private or by public enterprise, one should not be dogmatic in favor of either one form of enterprise, but should be open-minded and choose the one that can perform better. In reality the choice is seldom, if ever, made by this test. Compared with private enterprise, public enterprise has very decisive weaknesses. Even if these were generally recognized, they would probably not dis suade a part of the electorate from endorsing the choice of public enterprise, but in many instances they would prevent the rnajor ity decision in its favor.

Public enterprise operates usually as a monopoly, i.e., without the constant test of its performance by competition. In most instances it does not have to cover its full costs of operation because the public underwrites its losses. It has a minimum of incentives to improve its efficiency by innovation of equipment or procedure because such managerial decisions involve not only the opportunity of gain, but the risk of losses, which civil servants are not supposed to take unless they have received from superior officials, upon application, a full authorization to go ahead. This inhibition is worst where public enterprise is operated by civil servants with security of tenure, but even where the management is engaged by contract with a limited renewable term, the tendency is powerful to follow common traditional rules and standard procedures. The manager of a public enter prise is not, and therefore cannot-indeed must not-act like, a free, self-reliant· entrepreneur, but must act as an employee who is dependent on the political approval of his superiors and, in the end, of the public itself.

On this subject a very independently minded and resourceful sociologist, Richard LaPiere, had this to say: 36 T'he New Argument in Economics Any transfer of authority-religious, economic, or political-from small, local groups to a centralized representative of many such groups reduces by that much the possibility of deviation between such groups and the individuals composing them, increases by that much reliance upon fixed rule and regulation, and shifts by that much determina tion of group behavior from interpersonal give-and-take to imper sonal bureaucratic operations. In such matters as highway construc tion, traffic control, and public sanitation, the advantages may all lie with centralization of authority and what stems from it. As more and more aspects of social life come under the jurisdiction of centralized authority, political or otherwise, there is, however, a progressive re duction in the scope of individual enterprise and in the social value placed upon initiative. 8 Public enterprises have the tendency to perpetuate them selves even when the tasks for which they were established have long been solved, and even when the enterprises have been in the prolonged process of liquidation. This holds for public enterprises in general, but in particular for those thousands of governmental business units unknown to the general public.

This latter situation prevails in the area of the armed forces, where literally thousands of business enterprises are being formed that are very hard to close down and to keep closed down. However, civilian agencies of the Federal Government tend to have just as indestructible a longevity as the military establishments. 9 A typical example of the self-perpetuation of civilian public agencies is provided by the Rural Electrification Administration. Founded by executive order in 1935, and provided with statutory authority by act of Congress in 1936, its purpose was to give farmers and rural people in thinly populated regions the op portunity to have their farms connected with central-station electric-power service and telephones by subsidized loans at very low interest rates and with all administration expenses paid by the government. Several years ago it was recognized that this task had been fulfilled, and hence the agency could have gone into liquidation at once by transferring its obligations and assets to private banks. Of course, this was not done, and the Growth of the upublic Sector" 37 large government-bank administration now extends subsidized credit to a majority of nonrural people and, since January, 1961, even has begun to expand its activity and staff. Naturally the provision of subsidized credit through a government-owned and government-operated bank drives any private agency out of this field of operation.

One of the fields of economic action where the danger of an expansion of the public sector is particularly great is the supply of energy and energy-bearing materials. For over four decades these basic industries have fascinated all the proponents of the planned economy. Hydroelectric power plants and power trans· mission have long been claimed for the domain of publicly owned apd publicly operated enterprises. At present a new move is under way to nationalize electric power in the United States via huge regional and interregional grid systems of federal power transmission lines costing many billions of dollars. This may mean a new threat to private enterprise in electric-power generation and distribution, because expanded government con· trol can drive private utilities, out of business at any time by subsidized rates of public plants that pay no taxes and can attribute parts of their costs to various benefits, including intangib,le ones.

Economic theory generally offers no guidance for judging the differential performance of public and private enterprise. But we can point to certain crucial weaknesses of public economic action. The tax-fed public sector within the frame of political democracy is superimposed upon the supporting structure of the private economy. while it is simultaneously interfering and com peting with the enterprises that constitute the private economy. The greatest weakness of a major part of the public sector lies in the segregation of the bearing of costs from the reaping of benefits, particularly at the federal and state levels of government. However, often this is true even at the local level of government. Since the economic activities of the public sector expand in relation to political control of votes, some groups of people are always tempted to try to get benefits without sharing in the costs. Because this requires little more 38 The New Argument in Economics than pressure-group tactics, it is a happy hunting ground for local and regional politicians. In the long run, of course, it is an illusion for beneficiaries to expect to escape entirely sharing the costs. But their successful political pressures frequently lead to substantial waste of the nation's resources and to unwarranted expendi tures.

It is a general principle of government that-as a matter of social justice and equal opportunities for all-it will distribute the costs of many vital services according to the ability of individuals to pay. However, if the principle of equalization of the burden of costs is driven to the point that any sufficiently determined political-pressure group can help itself to large mate rial benefits paid out of the federal treasury without sharing in the costs or with only symbolic contributions, obviously the results must be damaging to the national economy. This holds for insurance as well as interest rates on mortgages, and is particularly true for the federal financing of resource develop ment. If crop insurance applied equal premium rates across the country, it would lead to intensification of farming in the areas with the greatest weather hazards at the expense of the areas with the most stable and safe yields. If the people in states with hardly any traffic can build six-lane highways fi nanced out of federal revenues collected as taxes chiefly in other states, the national economy suffers from inappropriate alloca tion of scarce resources, which may create most serious traffic problems in those states that carry the burden of providing the tax revenues. Worse than this: if by such political waste the average national costs of production are lifted to such an extent that industries and commerce can no longer compete with prices of foreign producers in the world market, the nation will suffer severely in its economic well-being and face a crisis in its balance of payments and its currency.

Let us suppose that in a large community the inhabitants of one area insist on getting a new storm sewer. It would be a convenience but not a necessity, and a majority of the voters approve its financing through municipal bonds simply because they are people who do not own their homes but live in rented Growth of the upublic Sector" 39 apartments. They will not pay the interest on and the amortiza tion of the loan by an increase in the city property tax. Such action would involve again an expansion of the public sector as a result of the "something-for-nothing" illusion, because it would take only one or two years for the higher real-estate taxes to lead to an increase in rents. (Actually, local rents may be prevented from rising because of other factors, such as an oversupply of space for rent or competition from an adjacent area.) The economic consequences of this "something-for-nothing game" in the modern political economy of a federal republic of a multitude of states are particularly felt in the development of natural resources. It is much cheaper to produce food and certain industrial products in humid areas with an abundance of fresh water. Aided by the "something-for-nothing game," arid regions sometimes succeed in developing scarce resources of fresh water at the expense of the humid areas in the nation.

As a consequence, the national average costs of production will be raised above what they could be if the people were willing to obey costs rather than certain consumers' preferences for a desert climate. This side effect of the separation of cost-bearing from benefit-sharing is just as ominous in its impact on the economic and military strength of a nation as the general drift toward an expanded public sector. To get something for nothing tempts ·even economically sophisticated people, since it has become more or less accepted that inflation is a built-in part of the American economy. They believe, therefore, that inflation will take care of a major part of the costs of public investment in all sorts of assets of public convenience. When public bonds are financed with terms of thirty, forty, or fifty years to maturity, this calculated reliance on evading real costs even has some speculative reasonableness to commend it. The real costs lie in the erosion of the faith of the people in the basic justice of the economic system as a whole.

Another corrupting influence that weakens the private sector is exerted by the cynical reasoning of a considerable number of people who deeply resent the growth of the public sector. They 40 The New Argument in Economics persuade themselves to believe that since the Federal Government has taken such a substantial share by progressive income taxes and corporation taxes, they have actually already paid their part of the funds to be made available from the treasury for state and local public projects and therefore have no reason to oppose state and local claims to federal appropriations for water, power, or transport development; local sewage-treatment plants; or similar facilities for strictly local benefits. I confine myself to these few examples of the tendencies of citizens to expand unwittingly the public sector, chiefly because of the separation of benefit-sharing from cost-sharing. There is another vast area in which on a world-wide scale the public sector is invading with exorbitant power the private sector of the economy and, like a parasite, either kills it or drains its energy to gradual exhaustion. The public in the United States, and probably also in Western Europe, does not see either the extent or the pace of this process correctly. In so far as the evaluation of the relative performance of public and private enterprise is concerned, the most instructive and reveal ing sphere of the economy is throughout the world neither water nor power nor transport, but agriculture. Agriculture) in the broadest meaning of the term, including forestry as well as horticulture, is; one of the most hotly contested areas of human action and sociopolitical ferment. This is far more than an ideological debate, in view of the most gigantic experi ments of structural change in agriculture on large parts of the surface of the earth by coercion under the dictate of the state and with the iron rod of brutal penal codes. All this is done to foster more rapid economic development or growth, meaning primarily industrialization. In Soviet Russia, in the wake of the Bolshevik Revolution of 1917, private property in land was abolished. After 1930, millions of family farms were collectivized by force into 235,000 kolkhozes at first, aside from several thou sand sovkhozes) or large state farms. By 1958, the number of kolkhozes had been reduced to 60,000 through amalgamation into larger and larger operational units. lO The socialized kolk hozes are operated under elected and politically approved and Growth of the "Public Sector" 41 controlled managers. On these collective large-scale farms all the manpower is reduced to manual labor, stripped of all managerial functions. These kolkhoz workers are paid out of the kolkhoz net income according to the work units credited.

In 1955, kdlkhozes accounted for 80 per cent of the sown land area, and sovkhozes for 16 per cent. The remaining 4 per cent were in private family use of the individual kolkhoz members, or urban workers, or a few of the last surviving individ ual small holders. Yet in spite of twenty-five years of powerful pressure from the government, the kolkhoz members have con centrated all their interests and skills on this minute amount of private land and have increased its production so much that in 1956 they earned by sales of products over 37 billion rubles not counting their own consumption-while their entire income and dividends from the common land yielded only 42.2 billion rubles. I1 In 1959, these little private plots accounted for well over 46 per cent of the Soviet Union's production of potatoes and vegetables, 38 per cent of the output of beef and veal, 51 per cent of the output of pork, 50 per cent of the output of milk, and over 80 per cent of the output of eggs.12 How doggedly the small private enterprise continues to survive all the brutal coercion and persecution, and how it tries to fill the gap left by the inefficiency of collective enterprise is particularly well illustrated by the animal husbandry of meat and milk-producing livestock and birds. In 1956, the Soviet Government passed a law severely limiting the ownership of livestock by city dwellers. In June, 1959, Khrushchev reminded the Soviets that in spite of that law there was only a small decrease in the number of farm animals kept by city dwellers and recommended a law prohibiting the ownership of such ani mals by urban people. Subsequently the Russian, Ukrainian, and Kazakh Republics decreed that the urban owners had to sell such animals to collective and state farms. Slaughter was put under heavy penalty, and noncompliance with the decree was punished with confiscation. Interestingly enough, it was not sanitation, public health, or the inconvenience of bad odors 42 The New Argument in Economics or unsightliness that banished goats and pigs, cows, calves, and chickens from the paradise of all proletarians; but the offensive..

ness of strong private initiative on the part of the workers and their wives.13 According to the latest data from the Soviet Union, the four per cent of privately operated land is responsible for 38 per cent of total agricultural production. American agricultural experts returning from trips through Russia report the conspicuously prolific growth of the intensively fertilized and cultivated crops on the individual family plots compared with the conspicuously hungry look of the crops on the kolkhoz fields. The disastrous results of forcing over 120 million families, which operated as many family farms in Communist China, into some 24,000 rural communes with an average of 5,000 families have induced the Mao regime to recede from the "big jump forward" and to decentralize the operation of farm land into pro duction brigades of 200 to 300 families, and to hand over to the farm families small plots for private exploitation. This does not prove anything about the future policy of the Chinese Soviets.

All it does prove is the enormous resiliency and effective .. production incentive of private initiative in family farming, where necessary adaptation to unique local, natural, and eco.. nomic conditions defeats centralized decision-making by bureau .. crats regardless of their scientific training and competence. As the distinguished French agricultural economist Dr. De Lauwe shows in his thorough analysis, based on extensive travel in the Soviet Union in 1955 and 1960, the small family plots have been from the beginning of kolkhoz farming an enigma for the agricultural economy.I 4 Potentially they always have been either a supporting institution for the productivity of the col lective enterprise or a parasite that sucks it dry of its best human resources. This is why the government has, for thirty years, been continually seesawing between reducing the leeway for the residual private enterprise of the family plots and expanding it.

However, in order to grasp the genuine weakness of the collective farm system of the Soviet Union, as well as all sorts Growth of the "Public Sector" 43 of so-called "cooperative" farm enterprises in other countries, we must look at the form of their management. It is obviously impossible to conduct the decision-making on a farm by demo cratic procedures. There are two kinds of the myriad of decisions to be made: first, those that determine the structure of the enterprise or its organization for the longer term of several years or for one crop year, such as the crop plan; and second, those that determine the operational or functional decisions from day to day and for certain seasons during the year, down to the hourly instruction of each worker. Therefore, the kolkhoz statutes prescribe the method of partici pation· of the members in the management of their farm enter prise. The general assembly, which according to the statute of 1935 "directs the affairs of the kolkhoz/' elects the administra tive councilor board of directors and also elects the president nominated by the local Communist Party authorities. The elec tion formula excludes secret ballots and instead provides for acceptance of the decisions of the general assembly of kolkhoz members by the raised hands of the majority, i.e., an open standing vote.

This procedure reveals some of the most crucial defects of the collective system. Probably the selection of the powerful president and general manager of the large-scale farm enterprise is influenced primarily by his political standing in the judgment of the single party command, and secondly by his forensic vote getting capacity, and to a much lesser degree by his genuine capacity to manage the enterprise with skill. The results of thirty years of this gigantic experiment, still involving 45 per cent of the labor force of the U.S.S.R., show the weakness of the whole system. As Dr. De Lauwe reports, it is assumed in the Soviet Union .that no more than perhaps 10 per cent of the kolkhoz presidents are performing satisfactorily. Khrushchev has said, "Nobody has calculated how much a bad president costs a kolkhoz. But he costs very dearly." 15 There is a heavy turnover in these presidencies.

However, this weakness of the management elected by ulti mately political procedures is not the worst defect of the whole 44 The New Argument in Economics system. The much greater loss in this system probably stems from the fact that it condemns to idleness and total waste the vast potential inventiveness, ingenuity, and native abilities of aimost one-half of the manpower of a country with 230 million people. They are reduced to manual gang-labor-the so-called "work brigades," which reduce the work output or its quality below the average of its potential. Aside from this reduction of output per worker, this whole coercive system has deprived the farm people of freedom and all its benefits-in production, consumption, and the development of their full human potential -for the individuals, the families, and society as a whole. So far, more than thirty years of the Soviet Russian agricultural experiment have achieved only the confiscation of over 50 per cent of the gross income of the farm population and its transfer to investment in state-owned and state-operated industries, keep ing the food supply of the Russian people at an anachronistically primitive level. This experiment has not proved at all the con tention that the acceleration of the process of industrialization justifies the gruesome hardships imposed on the farm population for over forty years. On the contrary, the considerably faster growth of Japanese industries on the basis of much scantier agricultural resources is convincing proof of the opposite, because Japan has distributed private property rights in land in an agrarian refoTlTI-which is the diametrical opposite of collectiviza tion of agriculture.

Several Latin American states such as Brazil, Argentina, and Uruguay have also squeezed half of the gross return out of agriculture by means of foreign-exchange control and by skim- ' ming off the amount of private revenues that is wanted for subsidization of new industries. In other words, a collective farm system is only the most radical sledge-hammer method of aiming at these highly dubious results of forced industrialization. While collectivization is the most destructive method in so far as growth of productivity is concerned, the other more con cealed methods also generate a decided drift into more and more public enterprise. With reference to agriculture, certain ideas are very popular Growth of the ((Public Sector" 45 outside of the Sino-Soviet bloc. They try to combine the nationalization of agricultural land, particularly in order to dis place "absentee landlords," and the transfer of a limited non negotiable title to such publicly owned land in small units to farm laborers or tenants, or the leasing of the publicly owned land to them. The stigma of being absent is used to indicate that the landowner has no function and hence collects unearned income as a parasite. If this were not vicious propaganda, it would reveal utter ignorance of the division of labor and the partnership of the owner and the operator of an enterprise. Moreover, if absenteeism were damnable, then bankers, brokers, commission merchants, architects, all would have to be damned too.

Both arrangements have serious defects. If the land is "owned" but cannot be encumbered, leased, or sold, a considerable part of it will be poorly utilized. The necessary gradual move ment of the land and water resources into the use of the most competent and efficient managers, inherent in private property, is now blocked by law. Since no elimination of the unfit operators of such resources takes place by the competitive market proc ess and eventual foreclosure in case of a lack of liquidity on the part of the owner, the government itself must estab lish procedures to deprive the unfit of their privilege, i.e., evict them and replace them with more competent farm op erators. This is, of course, a procedure that gives public admin istration exorbitant power. Such power may at any time be used arbitrarily and with considerable bias-political, racial, religious, or economic. It brings the danger of corruption, if only as the result of self-defense on the part of the victims against the worst outrages. However, if the other choice should be made -namely, to lease state-owned farms by open bidding-the land may move into the hands of those who offer the highest rent and later default. The centralized administration of the leases, the supervision of the maintenance of all fixed capital by the state as an institutional absentee landlord, has far less economic efficiency and far more opportunity for bureaucratic and over bearing treatment of tenants than a totally decentralized system of private landlord-tenant contracts, with courts and the legis46 The New Argument in Economics lature as the guardians of the rights of both parties. The despair of the people in different countries who suffer from the in humane operation of vast centralized bureaucratic administra tions of government-operated business enterprises was best ex pressed by an employee of the French railroads who said to me: "Sir, one cannot talk intelligently with a machine. But it is our destiny to have to work under giant machines."

My excursion into agricultural policy was not contemplated as an evasion of the subject because of my interest in these prob lems, but it was motivated by several observations. I believe that in highly advanced industrial countries, as well as in coun tries at various earlier stages of economic development, the greatest aggregate of social and political pressures that operate toward the expansion of the public sector is active in the part of the political economy that comprises the farm population. Agriculture is the sphere within a national economy where economic development requires and brings about the most pro found structural changes and therefore causes serious hardships connected with the necessary mobility of human resources. There is another dimension of human action where, in the most advanced countries of the world, a massive assault on the private sector is under way on the broadest front and at all levels of government-local, state, and federal. This dimension is education in ~ll its phases and forms, including research.

Today, in the English system of higher education, 68 per cent of all expenditures of universities and colleges are paid out of the treasury, and nearly 80 per cent of all students have publicly financed fellowships or other public aid. In countries on the European continent, including Germany, Switzerland, and Austria, the situation is not much different. And in the United States, where privately financed and operated higher education is still very healthy and vigorous, the distinguished and initial former Chairman of the Council of Economic Ad visers, Dr. Edwin G. Nourse, has appraised the situation as follows: "It is my belief as an economist that, in a country as rich and innately productive as ours, practical men will find that national growth and stability over future years will be Growth of the Hpublic Sector" 47 promoted by channeling a somewhat larger proportion of the national income through public treasuries. This is to say simply that, as we have a larger productive surplus above basic bread and-butter wants, we move deeper into an expanding area of public health, universal education, and national welfare that can be most fully activated and most equitably guided by our agencies of public enterprise. This does not imply socialism, communism, or autocracy; but that we the people shall be living up to our basic traditions of vigorous enterprise and en riched opportunities." 16 This regrettably correct and all too realistic diagnosis of our drift into a further expansion of the public sector gives not only the kind of testimony of Realpolitik that drives this country rapidly into an increasing system of centralized govern ment controls and reciprocal loss of individual freedom; this statement also contains a demonstrably erroneous view of the sources from which wealth flows, the causes why it flows, and the crucial differences between private and public enterprise.

Nourse implies that private enterprise has served to produce the more primitive "bread-and-butter wants," but that public enter prise is more productive when a larger proportion of the high quality services is wanted. This is indeed a strangely slanted summary judgment, which can be contradicted by an over whelming array of hard and incorruptible evidence. Unfortunately, as the academic discipline of economics is organized, taught, and practiced in nearly all American institu tions of higher learning, it leaves most members of the economic profession remarkably weak in laws of relevance and in the logi cal analysis of what constitutes valid evidence. Nowhere in this world is there, so far, any valid evidence, let alone any proof, that the decentralized organization of eco nomic activity under the severe test of competition and a flexible price system has been outperformed or even been faintly approached in its achievements of economic progress by cen tralized government-directed systems. Yet, paradoxically, in nearly all countries the private economy must continually be defended against the all-pervasive ferment in public opinion that depre48 The New Argum,ent in Economics ciates the private economy and simply assumes the superiority of those systems that depend on an expansion of the public sector.

Among the intellectual leadership in countries with a market economy there are too many people who see some transcendental values in collective forms of economic action and are prone to criticize the ordinary people for their stubborn insistence on their freedom as workers and as consumers. The defense against all those who seek the solution of most social and economic problems in more public and less private control of affairs requires first of all an understanding of the humane ends of the open society and the inalienable rights of individuals, and next, a better knowledge of the comparative strength and weak ness of private and public ownership and management of enter prise as alternative means toward those ends. Beyond such basic education the defense of civil liberty requires, particularly in a democracy, better information of the public about these crucial differences. Ultimately the wide divergence of views on these matters of policy derives from differences in values and the resulting diver gent goals. If agreement were reached on these, much of the controversy about means would end. Therefore, the discussion must chiefly be on the grounds of philosophy, and not over minor points in various more or less technical disciplines. I consider economics a scientific discipline that deals with the pursuit of happiness by human beings, endowed by their Creator with an immortal soul, who are not simply members of a somewhat advanced animal species. The individuals are the essence of a human society worthy of the name, and they make decisions and express their preferences with the full responsibility for decisions and acts. Freedom and human dignity and their vital role in man's capacity to create and use wealth for graceful living, assisting his fellow man, and building a humane and open society, must orient the discussion of the private versus the public sector.

NOTES Growth a/the Hpublic Sector" 49 l. Economic Report of the President (Washington, D.C., 1961), p. 57. 2. Ibid.~ p. 135: Total Government Expenditures, 1929 == $10.2 billion; 1960 == $137.0 billion. Gross National Expenditures, 1929 == $104.4 billion; 1960 == $503.2 billion. 3. Karl Albrecht, "Gegenwartsaufgaben langfristiger Wirtschaftspolitik." Paper presented before the Industrie und Handelskammer, Duesseldorf, July 4, 1961. 4. Colin Clark, "Public Finance and Changes in the Value of Money," The Economic Journal (London, December, 1945), pp. 371-389. Idem~ "The Danger Point in Taxes," Harper's Magazine (December, 1950), pp. 67-69; reprinted in P. A. Samuelson, R. L. Bishop and J. R. Cole man, eds., Readings in Economics (New York, Toronto, London, 1952), pp.74-78. 5. Cf. the article by A. T. Peacock and Jack Wiseman, "The Past and Future of Public Spending," Lloyd's Bank Review (London, April, 1961), pp. 1-20; and the article by Ursula K. Hicks, "The Control of Public Expenditures," ibid., pp. 21-36.

6. Cf. Karl Brandt, "Guidelines for a Constructive Revision of Agricul tural Policy in the Coming Decade," Journal of Farm Economics (Feb ruary, 1961), pp. 1-12. 7. Cf. Karl Brandt, "Agricultural Productivity, Economic Growth, and the Farm Policy Motivation of Urban Electorates," Food Research Institute Studies (May, 1961), pp. 83-93. 8. Richard LaPiere, The Freudian Ethic (New York: Duell, Sloan and Pearce, 1959), p. 264. 9. The (I-Ioover) Commission on Organization of the Executive Branch of the Government, Business Enterprises (Washington, D.C.), 1955; A Report to the Congress (May, 1955), listed (pp. 1 and 2) 47 different types of enterprise with over 2,500 separate industrial or commercial facilities owned by the armed services with a government investment of over $15 billion. A Special Committee of the House of Representa tives found in 1933 that 232 government-owned business enterprises started during World War I were still in existence fourteen years later.

(H.R. 1985, 72nd Cong., 2d Sess.) 10. At the XI International Conference of Agricultural Economists at Cuer navaca, August, 1961, Professor 1. S. Kouvshinov of the Timiriazev Agricultural Academy of Moscow gave the official figure for 1959 as 54,600. II. United Nations, Economic Survey of Europe in 1957 (Geneva, 1958), chap. I, p. 25. 12. Economic Survey of Europe in 1959 (Geneva, 1960), chap. II, p. 14; Economic Survey of Europe in 1960 (Geneva, 1961), chap. IV, p. 13.

50 The New Argument in Economics 13. Cf. U.S. Dept. Agr., For. Agr. Serv., The World Agricultural Situation, 1960 (Washington, D.C., December, 1959), p. 29. 14. Jean Chombart de Lauwe, Les Paysans Sovietiques (Paris, 1961). 15. De Lauwe, op. cit., p. 147. 16. Edwin G. Nourse, "1960: Hinge between Two Decades," The Virginia Quarterly Review, Winter 1961, pp. 1-14. Cf. also Max Ways, "A New Mask for Big Government," Fortune Magazine, April 1960, pp. 112-284.