Crisis and Liberty: Lecture 1

0:00Good morning, ladies and gentlemen. It's a pleasure for me to be a professor for a little while. I wouldn't want to overdo it. I used to be a professor, but the 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. 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 my talk, but I'll do my best, and maybe some of my rusty pedagogical skills will work a little better as we go along, I hope so.

0:51The 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 and Leviathan was, I think, recommended to you as good background reading and you won't be surprised if If you find me this week repeating some of what I wrote in this book, unfortunately I haven't learned everything new since I wrote this book.

1:58I wouldn't write it the same way today if I had to do it again, but most of the things I would do were in the early chapters rather than the meat of the book in the historical chapters. So, for the most part, I stand by the historical analysis that appears in Crisis and Leviathan. When I wrote Crisis and Leviathan, about the only book that took a broad view of the growth of the American government was the J.R.T. Hughes book, The Governmental Habit, and that was a useful book, and it's still worth a while 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 nuggets of insight and interesting facts and there are many of them in his work and that's what makes it worthwhile.

2:59but 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 well known to friends of the Mises Institute because he often comes here for talks and conventions and other occasions. 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 that was not held in great esteem and was viewed as 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 securing of liberty was relatively unimportant and

4:54The giving way to more and more democracy was held in ever higher esteem and as a result government has grown bigger and bigger. This book is a nice complement to my book Crisis and Leviathan because whereas I covered the period from the late 19th century 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 as it were non-emergency periods and events and so his book along with mine I think cover much of the ground 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 called Dependent on D.C. and the subtitle is The Rise of Federal Control Over the Lives of Ordinary Americans. Charlotte was a PhD student of mind if I may say so back in the days when I was a professor at the University

6:22of 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 knew what she wanted to do and how to do it and she really didn't require helped with 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 had work 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 and she's an extremely solid researcher, always gets her facts absolutely straight and documents them in the slightest detail so I think some of us suffer from from going off half-cocked sometimes and making Her book basically covers various federal programs from the 1930s to the present and

7:53covers 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 critical benefits that they used to provide through private So those are good background sources 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.

8:50Let me say just a few words about history in general. If you were here last week to hear Ralph Reiko, 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 others who work in that tradition. And that is fundamentally tradition in economic theory, or more basic than that even, in the theory of human action and praxeology. I don't know if it was Mises himself or one of his followers who is supposed to have said everything you need to know you can know by sitting in an armchair with your eyes closed.

9:41And that's one way to conceptualize the character of praxeology. The praxeology is the logic of action and once you start thinking about the idea of purposive, and then you can sit there with your eyes closed 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 and 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 one might say well if we can know everything by sitting in a chair with our eyes closed why do all this hard work of learning history that that requires that we open in our eyes that we do 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

11:02from sitting with our eyes closed to thinking. It's not necessarily easier or harder, it's is 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 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 skills and wisdom as a historian. A lot of judgment goes into historical interpretation and that's where many historians go astray because they're not good at making sound judgments.

11:54But Mises, I believe, 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 almost no prompting at all. I actually wrote it in a memoir after Murray died. He wrote a letter to me one time after I had drafted my book Crisis on the Life and 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 basically to me although it was sent to the Pacific Research Institute which was sponsoring my book passed along to me, but this was a 20-page, single-spaced letter, which consisted basically of

13:18recommendations for reading. He would say, well, Professor Higgs has slumbered at this point.

13:29He 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 Schmo on something I never heard of, so Murray was an extraordinary historian, and I don't think any of us can really expect to equal him in that regard, because it requires some genetic equipment that I suspect the rest of us are lacking, but But in all events, he also did a lot of hard work, even with the skills he brought to the endeavor to learn history and he absorbed a huge amount of it and wrote a great deal, interpreted historical work and it's, besides being educational, it's great fun. Murray was a sprightly writer, if anything.

14:28We 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 policies seem to rest on misunderstanding the law of demand, for example. They do little things like that, but very often they're a little more complicated and basically make assumptions about how people will will respond to various stimuli, for example. A few months back, Paul Wolfowitz told us that as soon as American forces entered Iraq, the Iraqis would come forth waving and throwing flowers and celebrate us for liberating it. Well, Mr. Wolfowitz was making a judgment about how the world works, assuming he was 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.

16:16Well, now we see, I believe, that he was wrong. In fact, there wasn't a lot of throwing flowers on American troops. Indeed, rocket-propelled grenades are closer to the mark, and they're being thrown daily now at these unfortunate American soldiers who put themselves in harm's way in discovering how people But all policy proposals rest on judgments and understandings about how the world works. Where do these judgments come from? They come from people's understanding of history. People say we can't do such and such because we know from what happened in 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 and Brooklyn.

17:24People make judgments and sometimes these particular historical events, like that one I just mentioned, the Munich analogy, turn 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 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 around some There are some implications of human action, but for more complex events and how they are interrelated in the world, we can't just rely on praxeological understanding.

18:45We have to add what Mises calls in thymology. Thymological understanding is the kind that combines our praxeological understanding with our knowledge of what people are actually trying to do. What do they know? What do 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, history is the only place we can go to find out the specifics.

19:30Even praxeological knowledge doesn't tell us magnitudes. So 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 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 physicists have arrived at laws of physics, laws of nature.

20:22We know that in a vacuum, objects fall at 32 feet per second per second. 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 divide the laws of history. and 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 The Theory of History was that there are no laws of history and there can't be any.

21:14Because 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. 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 given objectives. They're constantly changing. Every day you live, 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 hold.

22:06So, there can't be any laws of history, and some might say, if there can't be any laws of history, what's the point? Why are you doing all this hard work of historical research? You're not going to arrive at some kind of generalized knowledge, some kind of statement about how the world works in time. And the answer is that even if we can't have laws of history, We can discover some pretty good patterns and some pretty reliable regularities. It doesn't mean they're surefire. It doesn't mean we can be absolutely certain that they'll happen in precisely the way that they've happened in history.

22:52But 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 we'd go mad. But we ordinarily develop those kinds of confidences, we know that certain things are good bets and we rely on them and we succeed as a result in achieving the ends we seek.

23:39And 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 be absolutely certain that they're going to recur. But we can have a degree of confidence that can make a bet. Now many historians talk as a shorthand, if in no other way, as if society did things, and I just want to caution this as we go forward that even I may sometimes refer to things that people in general believed or did, as if society were an actor.

24:32but this can never be more than a short-hand 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 coercive actions. Society is an abstraction. It's a concept. It's not an acting entity and so we need to be be alert to historical judgments 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.

25:28It doesn't mean that the individual actors in history are Adams. This is an old canard that anti-libertarians often throw at libertarians. You assume everybody's an island, an atom, that everybody's on his own. 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 atoms, and we're never going to be, but that doesn't mean that some abstractions such as society is an actor.

26:22Ultimately, all the actions are still being taken by individuals, no matter how embedded they are in the social context. So, when we think 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 individuals exist 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.

27:20So there's a constant going back and forth. Some historians have tried to argue almost as if ideas were the deciding force in determining the course of history. Others, no, it's just social reality. It's just big forces. It's things like industrialization or urbanization. Individuals just react. doesn't matter what they think well these views are both wrong because in fact both kinds of changes are taking place out of their interplay comes historical change but we're going to be talking this week about a particular form of historical change the so-called growth of government in just the United in the United States and the area that was the British North American colonies before it became the United States of America.

28:21So this is a little slice of historical space, but it's big enough, for me at least, 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 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. The economists became very interested for a while and then political scientists got involved and others joined the hunt to try to explain the growth of government.

29:12And modern social science being what it is in the mainstream, this quickly became a gigantic econometrics exercise in which my econometrics was cleverer than yours. That's how economists make their reputations in the mainstream profession. Unfortunately, although these studies actually got off to some promising beginnings, they tended to go astray in various ways because they turned into the usual mishmash, swamp, econometric quarreling, and along the way the analysts tended to lose sight of what the hell they were supposed to be understanding.

30:07and 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. Now in some cases they used alternative measures such as government revenues relative to gross domestic product. In a few cases they looked at employment, government employment relative to total employment or total labor force.

30:56Now you notice that whenever they 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 right away, in a sense, begs the question. Because if, for example, you had a growing economy, such as the modern Western economies, which tend to grow 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.

31:53If you had 3% growth of GDP and 3% growth of government, then 26 years later you'd say government has not grown, even though it would be spending twice as much money. Now this makes sense to economists because they think somehow that, well, government ought to grow, implicitly. If the economy is getting bigger, well, sure, government's got to get bigger too. Well, why is it that if General Mills produces more cornflakes, government has to spend more money? That doesn't really make a lot of sense. Why is it if the mom-and-pop shop on the corner hires another kid to 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 These measures can help to capture everything that government is doing. If, for example, the Supreme Court makes some ruling that cuts into the security of private property rights,

33:33Well, 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.

34:26So, we cannot trust them. The typical device of the econometricians is to say, well, I assume, they'll say, why 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. will 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? I believe we can indeed. The government is so multi-dimensional that it's very hard to describe as some kind of simple index that can be quantitatively measured. In In addition, the modern governments, such as those in the United States, are multiple entities.

35:30We have, of course, a federal system in this country, so we have a central government, which we call 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 altogether, each of them has a government. And within the counties there are subunits, in some cases there are units such as townships that have little government functions of their own. And then we have hybrid entities like court 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, are backed by force and they impose taxes. In the United States in recent years there are more than 80,000 separate governmental entities operating, 80,000 and more than 60,000 of them have the power to tax. So that's a lot of There's a lot of different governments. Now it's true that no given individual, thank goodness, is subject to every one of them.

36:50We might be pulled into oblivion by all the competing forces to get at our substance. 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 plundering the private sector and living at its expense all agree what they want to do.

37:38What do they want to do? They all want to grow and get more of our money and exercise more power over us. Well, yes, yes and no. Because very often they actually find themselves competing with one another. We all are familiar, for example, with how states are always quarreling with the federal government Who's going to regulate a certain activity? Or who's going to get to tax a certain activity? 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 switching 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 The federal government would remit 90% of that tax to the states, so having their arms twisted in that fashion was enough and 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 the sharing of revenue and so government in the United States is a very complex assembly

39:24Sometimes conspiratorial, sometimes competitive across these different entities, and it just makes life diabolically complicated for people trying to understand what's going on sometimes.

39:42Well suppose, just to get us off the ground, that 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 We can easily get out of the national income product accounts data because the government spending for goods and services is a component of GDP, final goods and services.

40:39If we go back to 1900s, say, we'd find that governments at all levels in the United States have spent an amount of money equal to about 6% of GDP to purchase final goods and services, 6%. 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 finding goods and services, but for everything, including transfers. But as you can see, in the past, back here in the, you can also see that there's a, that's 1860, it looks like 1880.

41:30We see a big peak of the 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 it trends down for a long time until the next spire during World War one jumps up again and falls back but not all the way and then there's a another peak in the early 1930s with the collapse 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 II and the whole The whole economy was semi-collectivized for a few years, but that falls back, not all the way, of course.

42:33And then we have this kind of upward trend here, but that's the next measure I was going to tell you about. If we went back to 1900, you'd look not just at government spending for currently producing goods and services, In 1900 that was 7% of GDP. Now notice, we only added one percentage point when it went from government purchases of goods and services to all government spending back in 1900, it went from 6% to 7% as our measure decides the government. And that's because government didn't make many transfer payments in 1900.

43:19The bulk of them were, at that time, transfers to veterans of the Civil War, and many of them were already dead by 1900, so the payments were actually going to their survivors, Their wives and children and third cousins were twice removed. 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. Transfers in and out too much, but if we come up to the present, the government spending of all kinds, that chart shows just the Federal, but if we throw in all kinds, we get to somewhere between 35 and 40 percent now.

44:26of 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 since World War II, government purchases of final goods and services have grown only at about the same rate as GDP, but these transfers have and so they've become 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. Transfer programs are like the stars of the heavens.

45:15And, of course, now we're getting even the new one, a giant, very expensive one for prescription payments. It's going to buy a few votes, politicians think, in the next election. And this one, you don't need to be a rocket scientist to forecast. We'll be just like Medicare. When Medicare was put into effect back in the 1960s, they forecasted what it would cost. Costs and within about 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 lived in Britain about 30 years ago for a while and discovered that their National Health Service made prescriptions free when it was begun back in the late 1940s and as a result what do you know? People were camping out at the pharmacies demanding medicine for everything they could think of and getting it free and the cost went

46:28through the roof. The British finally, even the British, decided they couldn't tolerate that and so So, when I lived there, their means of dealing with it was to put a charge on 50 pence, you know, half a pound still, 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% in the number of prescriptions people were demanding at the pharmacy, so 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 how these things work.

47:21Government 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. 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.

48:16Some 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 in a host of ways, all these things dictated by government, but without any pay for us to carry out the demands, we are in fact all working for money, to some extent, we're just not even getting paid, we're paying for the privilege. Well let's take a quick look If you 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.

49:52One of the commonest ideas, particularly among historians, is what I call the modernization hypothesis. The idea that as economies develop, as they industrialize and urbanize 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 a 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 deliver the mail and teach the kids in the public schools in a world with the internet and satellites and cell phones. Obviously we have to have a lot more government to keep things from flying apart. Well, this has a lot of There's a lot of appeal to many people. Not all of them confined in asylums.

51:22They're convinced that it's just unthinkable that you can have a modern economy with a very small government. Look at all the things we wouldn't have. No agriculture department, no labor department, no commerce department, No SEC, or Martha would be running amok. 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 the complexities are managed.

52:11Well, 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 probably hired at greatest length, the more complex the socio-economic world becomes, the less capable of managing it government becomes. You 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.

52:57But 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 entail what Hayek called the pretense of knowledge. Of course, modern thinking about government is full of the pretense of knowledge. It's a pretense I'll be coming back to again and again this week. But the modernization hypothesis is a corollary of the pretense of knowledge.

53:43We didn't have to have bigger government because we had big corporations, 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 modernization entailed the complex of market failures. Market failures in neoclassical economics have to do with deviations between the makeup of the world and the makeup of the blackboard. Neoclassical economics has a model, writes on the blackboard, of how things would be if they were efficient.

54:33And we had Pareto optimality. Every resource was being used in its most valued alternative. Every consumer had adjusted his purchases so that he was in perfect equilibrium. He couldn't make any readjustment to make it 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.

55:18But 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. This is all fantasy world. This has nothing to do with how reality operates. Nonetheless, some of these inefficiencies, things like spillovers, negative externalities, do have counterparts in reality.

56:04And so you can say, well, maybe there's something there anyhow. So when a factory spews smoke out and it spills over onto the neighbors and damages their property, well, that's a negative externality. The Federal Reserve has 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 lay a tax on the activity of the factory, or a tax on the amount of emissions that spews forth, Various things might be done to alter the situation so that third parties wouldn't be damaged by actions they haven't agreed to endure.

56:59Well, 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 if only something could be done to tax the people who are spewing these things onto me, I would feel better off, but we all feel that way, 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 rudiment?

57:51And the answer is, not very much. Of all the things that government does, most of it has no plausible connection whatsoever with reining 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 we can all hope we won't be the ones spilled onto by the uranium-coated 20-millimeter cannon bullets, but this isn't a very good explanation.

58:36and 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 lapses of competition, the fact that we don't have a thousand producers of homogeneous goods in every industry, well that's just preposterous. Since these are inconceivable conditions in reality, to indict reality for failing to mimic them makes no sense whatsoever. The world is full of heterogeneous goods, goods produced only by a few producers, constantly changing the characteristics of their goods and the terms on which they offer them to consumers.

59:29Of course, these people are often, if not always, fiercely competitive in the sense of being rivals 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 goods that have a peculiar quality that once they're produced, there's no marginal cost associated with anyone's being added to the class of users.

1:00:21Some people dispute that public goods exist at all, 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 a rule to coordinate everybody's driving. is driving, you drive on the right-hand side of a two-way street. That's a general rule, it's public good, it's the same for everybody, presumably we'll all benefit from adopting that rule, not that we wouldn't have had the sense to do it without the government making the rule, but nonetheless, if the government makes a rule that assists us in coordinating social life and we can add more drivers and new babies can be born into society, may benefit from the coordination of that rules existence. That's a public good, I think, but true public goods are pretty few and far between.

1:01:29The 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 defense deterred a 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, New people were added to the population, they enjoyed that protection at no additional cost, and so forth. So, it's 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.

1:02:32They call education a public good, although it's not. It doesn't satisfy any of the criteria, being a public good. They call public health measures public goods, although beyond a certain limit, you've got to spend more money to provide sewerage service for more people. It's not like deterring nuclear attacks, and once you build a sewage system in Auburn, it's good for the whole country for that. 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.

1:03:25All these market failure explanations are bad, among other things, because they involve a black box explanation. They say, well, there was an inefficiency, boom, government grew. Well, why? 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 interests? Did that get him reelected? How did he know there was an inefficiency? These explanations are more like apologies or excuses for growth of government than they are good historical interpretations of why it actually grew. Recognizing that problem, some analysts have seized on interest groups and they said, well, interest groups have tried to use the power of government to promote their purposes and that made government grow.

1:04:21Well, yeah, there's no disputing there are a lot of organized groups trying to use the power of government, so that has some promise. We might wonder why it was that they didn't get organized until the 20th century. Didn't interest groups want to use the power of government before? Well, 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 beforehand. We're back here in the 19th century when government was, at least by that measure, so small. I'll suggest tomorrow that it was really bigger than that. Certainly it's much bigger by any measure now than it used to be.

1:05:07What's happened to these interest rates? Did they just wake up and discover that they can use the power of government to promote their narrow interests? doubted. Some of the models 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 more like toys. They don't get us involved in terms of actually understanding who and who did what to make government get bigger over time. A number of people have advanced ideology as an explanation and this has been popular with people of various political philosophies.

1:06:01This was varied as, say, 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 it's, in the end, it's ideas. Mises said that the practicalities are greatly overrated and I suppose as an intellectual himself he was just trying to tell the world about how important people like him really were and unfortunately there was more than germ of truth in what he was saying in his particular case but Hayek and Mises and Keynes all agreed that if you can have the development of ideas which lead people to take The Actions Making Government Grow or Shrink, and that ideas are powerful ultimately.

1:07:05This goes way back. David Hume told us that all governments depend on public opinion. Etienne Delaguiti said that the minute we stopped kowtowing to the tyrant, he would topple. Many people have recognized that public opinion, what you 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 a potentially powerful explanatory factor, and I don't dismiss it at all.

1:07:51I don't think it's the whole story, however. I think it has to be incorporated along with other things that have happened 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 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 confine it to a limited set of functions.

1:08:38Well, finally, there have been some, and I'm often accused of being one of them, who blame the growth of government on crises, and again, this is an appealing idea because if one looks at any kind of standard measure of the growth of government, it does seem that the connection with crisis is not exactly random. It does seem to be a perfect match when there's a great social crisis, a big war, a terrible business depression in modern times. In fact, government does grow at an extraordinary pace. Of course, some people don't like to incorporate crisis in the explanation because they say it's a transitory effect.

1:09:29Well, yeah, it grows during crisis because it does all these emergency measures. But when the crisis is over, then all those crisis measures are given up, abandoned, lapsed, and what really matters, in the eyes of many analysts, is the 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 slope upward? Why is it that it's doing that? And would it continue to do that if there never were any crises?

1:10:19Well, I'll argue no. 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, you know, forget them. Some analysts even leave the crisis years out of their time series. We don't want to contaminate our clean trains by 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 Well, why don't I stop my talking right now and let you ask questions. 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 in a moment.

1:11:45and the specifics that I'll get into in more detail Tuesday through Friday. I'm going to speak this afternoon about ideology in particular. So, your comments and questions now, please. Yes. Earlier you said that the current government employment is over 17% of total employment. Is that all government agencies or just federal agencies? That's all of them. In fact, if you look at federal government, it's just very, very tiny. It's something like 3%. But there's an interesting recent book by a man named Light, who works at Brookings of all places.

1:12:34And Mr. Light is something of an apologist for government and government employees. But nonetheless, he's written a very interesting book, and you can actually find it summarized online in some articles he's written, 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 was able to pump up federal employment as of a few years ago to 17% from three in a very plausible way.

1:13:21Now there's a little bit of double counting because in what Mike 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, 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. So the federal employment is much, much bigger than it's formally purported to be. Mark? Bob, you mentioned at the beginning about your book, it's been out about 15 years now and there's been some more recent work.

1:14:10Is there anything in your thoughts about the growth of government changed over that time? and become more pessimistic or optimistic concerning the growth of government?

1:14:30Actually, 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 was published in 1987 and many people, if you can think back to 87, some people were still in the thrall of enthusiasm for Reaganism and they actually believed that Ronald Reagan had somehow changed the course of events and had turned back the tide of big government, blah, blah, blah. I never believed that myself and I didn't see what happened during the Reagan administration as evidence of that at all.

1:15:15In 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. Reagan did some good things. He got rid of the price controls on oil and so forth. But he did some bad things, too. If we throw everything into the mix, it seemed to me that nothing fundamental had changed with regard to the growth of government. Certainly government spending was very rapid under Reagan. Taxes went up despite the first tax cut and so forth. So, nonetheless, many people were enthusiastic about Reagan. To my great astonishment, some people still are.

1:16:05They look back to the Reagan administration's golden age of anti-government. I never understand this. But my book, because it didn't recognize that any fundamental change was being made at the time by Thatcher or 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. Well, Higgs is a pessimist. Well, alright, I'm a pessimist.

1:16:52That gets you going, whether I'm a pessimist or a raving optimist. What I wanted the book to be viewed at was an exercise in analysis and history. I want 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, or 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.

1:17:45So, 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 of the fact that Bob Higgs is a pessimist, I think some people are given to wishful thinking. I don't begrudge them. I actually envy them. Murray Rothbard, whom I love dearly, was an inveterate optimist. No matter how horribly the world seemed to be going, Murray was always convinced, and we're going to beat the bastards. We'll win in the end. We'll come back. We're on the right side of events.

1:18:49Well, yes, we're on the 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 with regard to my judgments of the rectitude of what government does, regardless of whether government is shrinking, expanding, or wide. But what I would hope is that the analysis would be what people carry from me. Now, so far as the analysis is concerned, I don't believe I have, and I'll finally answer your question directly, I don't believe I've changed any of the fundamentals.

1:19:37I do believe that I have more understanding now of 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 even 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 seriously. And I took them seriously too, because I couldn't just dismiss them, I had to have a good basis for dismissing them.

1:20:28And I think we all should have a good basis for dismissing them. It's a fool's errand to just say you don't like somebody's way of thinking, therefore the hell with it. We need to understand what's wrong with it. But I believe I have a better understanding now of what's wrong with some of the standard hypotheses and so in that sense I've moved somewhat. But events have changed in some concrete ways as well. By the end of the Cold War, a very fundamental context was changed for the growth of government The Cold War was a very fecund basis for the maintenance and growth of government.

1:21:21Now, of course, government didn't just roll over and play dead when the Soviets, in a very unmanly way, just decided to implode. without even a holocaust or anything. Yellow bellies. 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 a new permanent war, the war on terrorism, which I never thought anything could be better than the Cold War.

1:22:19But this actually is, because whereas 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.

1:23:05I 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 on roadsides. And yet, 3,000 deaths, I'm not minimizing that, it was horrible. 3000 Deaths has been used as the basis for almost revolutionary changes in the nature of government's relationship to American society. The degree of penetration into people's day-to-day lives, of monitoring everyone's emails, of listening to everyone's phone calls potentially, of giving up entirely several elements of the Bill of Rights, such as the Fourth, Fifth, and Sixth Amendments, just throwing them out the window, willy-nilly.

1:24:08If you can get that kind of mileage out of two buildings being collapsed by airplanes, then I think you're in business pretty much forever. I suppose 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 wrong. But I don't believe today in anything else.