The Limits of What the State Can—and Should—Do for the Economy
An argument for reducing government controls.
The long-running Selected Papers series features notable work by University of Chicago faculty and other business leaders. This essay is an edited excerpt; the original was presented in 1963 at Swarthmore College, as part of a dialogue with Paul A. Samuelson of MIT.
- August 27, 1963
- CBR - Public Policy
There was an age when social dissatisfaction was kept in the house. All evils were ancient evils, and therefore necessary evils that served at least to keep men humble and patient. This resignation to imperfection has almost vanished in modern times—the hereafter in which all problems are solved has been moved up to two months after the next election. And government has become the leading figure in almost every economic reform. I propose to discuss what governments can do in economic life, and what they should do.
The question of what governments can do, what they are capable of doing, will strike many Americans, and for that matter most non-Americans, as an easy one. For it is a belief, now widely held and strongly held, that the government can, if it really puts its mind and heart to a task, do anything that is not palpably impossible. The government, we shall all admit, cannot really turn the number pi into a simple fraction by legislative mandate, nor can a joint resolution of the houses of Congress confer immortality. But with a will, the government can see to it that fully 85 percent of the male population, and a few women, are taught several infinite series for calculating, and, with a will, the government can prolong human life appreciably by suitable medical and social-insurance programs.
This acceptance of the omnipotence of the state does not represent a generalization of experience; it is not a product of demonstrated effectiveness in bending events to the wise or foolish designs of policy. On the contrary, the belief is an article of faith, indeed an article of almost desperate faith. It is not an intrinsically absurd belief; there is no rigorous logical demonstration that the state cannot turn sows’ ears into silken purses. There is also no logical demonstration that all men cannot become saints, but the number of saintly men has not yet risen to the level where the census makes it a separate statistical category.
Our faith in the power of the state is a matter of desire rather than demonstration. When the state undertakes to achieve a goal and fails, we cannot bring ourselves to abandon the goal, nor do we seek alternative means of achieving it, for who is more powerful than a sovereign state? We demand, then, increased efforts of the state, tacitly assuming that where there is a will, there is a governmental way.
Yet we know very well that the sovereign state is not omnipotent. The inability of the state to perform certain economic tasks could be documented from some notorious failures. Our cotton program, for example, was intended to enrich poor cotton farmers, increase the efficiency of production, foster foreign markets, and stabilize domestic consumption. It is an open question whether 28 years of our farm program have done as much for poor cotton farmers as the trucking industry.
What the state can do
So what economic tasks can a state perform? I propose a set of rules that bear on the answer to that question.
Rule 1: The state cannot do anything quickly.
It would be unseemly to document at length the glacial pace of a bureaucracy in double step. Suffice it to say that if tomorrow a warehouse full of provisions labeled “For General Custer: Top Priority” were found, no one would have to be told whether the warehouse was publicly or privately owned.
A decent respect for due process lies behind some procedural delays, and poses a basic issue of the conflicting demands of justice and efficiency in economic regulation. But deliberation is intrinsic to large organizations: not only does absolute power corrupt absolutely, it delays fantastically. I would also note that initiative is the least prized of a civil servant’s virtues, because the political process allots much greater penalties for failure than rewards for success.
Rule 2: When the national state performs detailed economic tasks, the responsible political authorities cannot possibly control the manner in which they are performed, whether directly by governmental agencies or indirectly by regulation of private enterprise.
The lack of control is due to the impossibility of the central authority either to know or to alter the details of a large enterprise. An organization of any size—and I measure size in terms of personnel—cannot prescribe conduct in sufficient detail to control effectively its routine operations: it is instructive that when the New York City subway workers wish to paralyze their transportation system, they can do so as effectively by following all the operating instructions in literal detail as by striking.
I estimate, in fact, that the federal government is at least 120 times as large as any organization can be and still keep some control over its general operations. It is simply absurd to believe that Congress could control the economic operations of the federal government; at most it can sample and scream. Since size is at the bottom of this rule, two corollaries are:
- Political control over governmental activity is diminishing.
- The control exercised by a small city is much greater than the control exercised over General Motors by its board of directors.
Rule 3: The democratic state strives to treat all citizens in the same manner; individual differences are ignored if remotely possible.
The striving for uniformity is partly due to a desire for equality of treatment, but much more to a desire for administrative simplicity. Thus men with a salary of $100,000 must belong to the Social Security system; professors in New York must take a literacy test to vote; the new automobile and the 1933 Essex must be inspected; the most poorly coordinated driver and the most skillful driver must obey the same speed limits; the same minimum wage must be paid to workers of highly different productivities; the man who gives a vaccination for smallpox must have the same medical credentials as a brain surgeon; the three-week-old child must have the same whiskey import allowance as a grown man; the same pension must be given to the pilot who flew 100 dangerous missions as to the pilot who tested a Pentagon swivel chair; the same procedure must be passed through to open a little bank in Podunk and the world’s largest bank in New York; the same subsidy per bale of cotton must be given to the hillbilly with two acres and the river valley baron with 5,000 acres. We ought to call him Uncle Same.
Rule 4: The ideal public policy, from the viewpoint of the state, is one with identifiable beneficiaries, each of whom is helped appreciably, at the cost of many unidentifiable persons, none of whom is hurt much.
The preference for a well-defined set of beneficiaries has a solid basis in the desire for votes, but it extends well beyond this prosaic value. The political system is not trustful of abstract analysis, nor, for that matter, are most people. A benefit of $50 to each of 1 million persons will always seem more desirable than a $1 benefit to each of 150 million people, because one can see a $50 check, and hence be surer of its existence. In fact, it is worth mentioning one corollary of Rule 4: no politician will worry much about anything that can’t be photographed. Another corollary is: if Texas wants it, give it.
The suspicion of abstract theory is of course well founded: most abstract theories recorded in history have been false. Unfortunately it is also an abstract theory, and a silly one, that says one should believe only what one can see, and if the human race had adhered to it, we would still be pushing carts with square wheels.
You do not need to be told that someone is always hurt by an economic policy, which is only a special case of the basic economic theorem that there is no such thing as a free lunch. On the other hand, I do not say that all political lunches are priced exorbitantly.
Rule 5: The state never knows when to quit.
One great invention of a private-enterprise system is bankruptcy, an institution for putting an eventual stop to costly failure. No such institution has yet been conceived of in the political process; an unsuccessful policy has no inherent termination.
The two sources of this tenacity in failure are the belief that the government must be able to solve a social problem, and the absence of objective measures of failure and success. The absence of measures of failure is due much more to the lack of enterprise of economists than to the nature of things. One small instance is the crop-forecasting service of the Department of Agriculture. This service began shortly after the Civil War, and it eventually involved thousands of reporters and a secrecy in preparation of forecasts that would thwart Central Intelligence. It was not until 1917 that a Columbia professor, Henry Moore, showed that the early season forecasts were almost as good as flipping a coin, and the later season forecasts were almost as good as running a regression equation on rainfall.
Let me emphasize as strongly as I can that each of these characteristics of the political process is a source of strength in some activities, as well as a limitation in other activities. If the state could move rapidly, contrary to Rule 1, and readily accepted abstract notions, contrary to Rule 4, our society would become the victim of every fad in morals and every popular fallacy in philosophy. But what are virtues in the preservation of our society and its basic liberties are not necessarily virtues in fixing the wages of labor or the number of channels a television set can receive.
These rules, and others that could be added, do not say that the state cannot socialize the growing of wheat or regulate the washing of shirts. What the rules say is that political action is social action, that political action displays reasonably stable behavioral characteristics, and that prescriptions of political behavior that disregard these characteristics are simply irresponsible. To say, after describing a social economic problem, that the state must do something about it is equivalent in rationality to calling for a dance to placate an angry spirit. The state can do many things, and must do certain absolutely fundamental things, but it is not an Aladdin’s lamp.
What the state should do
I turn now to the proper economic role for the state. I propose merely to sketch what I believe is the proper treatment of certain classes of important economic problems.
Class 1: Monopoly
The fear of monopoly exploitation underlies a vast network of public regulation—the control over the so-called public utilities, including the transportation and communication industries and banking institutions, as well as traditional antitrust policies. The proper methods of dealing with monopoly, in their order of acceptability, are three:
- The maintenance or restoration of competition by the suitable merger-prevention policies, which we now fail to use in areas such as rail and air transport, and by the dissolution of monopolies. This method of once-and-for-all intervention provides the only really effective way of dealing with monopoly.
- Where substantial competition cannot be achieved—and I do not ask for perfect competition—the entry into the field is often controlled by the state. For example, the TV channels are allocated by the Federal Communications Commission. Here, auctioning off the channels seems the only feasible method of capturing the inherent monopoly gains. The history of regulation gives no promise that such gains can be eliminated.
- In the few remaining cases in which monopoly cannot be eliminated or sold to the monopolist, monopolies should be left alone, simply because there is no known method of effective control.
Class 2: Poverty
A community does not wish to have members living in poverty, whatever the causes of the poverty may be. The maximum level of socially tolerable poverty will vary with the society’s wealth, so poor societies will stop short at preventing plain starvation, but Texans will demand, through the oil embargoes that Presidents Eisenhower and Kennedy found expedient to accept, also Cadillacs and psychiatrists in their minimum poverty budget. I consider treatment of poverty a highly proper function of the state, but would propose that it be dealt with according to two principles:
- Direct aid should take the form of direct grants of money, and only this form. The present methods involve an unending chain of grants in kind: some subsidized housing, some subsidized medical care, some subsidized food, some rigged selling prices of cotton and wheat, some lunches for children, and so on. Not only are many of these policies grossly inefficient, they also impose gross limitations on the freedom of the poor. If the poor would rather spend their relief checks on food than on housing, I see no reason for denying them the right.
- The basic problem of poverty from the social viewpoint, however, is not the alleviation of current need but equipping the people to become self-supporting. Here we have been extraordinarily phlegmatic and unimaginative in acquiring understanding of the basic problem of low productivity and in devising methods of increasing the skills and opportunities of the poor. We have become so single-minded in worshipping the curriculum of the good liberal-arts college that we have only a primitive system of industrial training. We tolerate widespread restrictionism on entry by unions, when it is the excluded entrants we should be worrying about.
Class 3: Economic distress
I define economic distress as experiencing a large fall in income, or failing to share in a general rise, but without reaching some generally accepted criterion of poverty. Of course the two differ only in degree. Much of our farm program, our oil program, our protective tariff system, our regional development schemes, our subsidies for metals and soon for commuters, are so motivated. Here my prescriptions would be:
- Compensation for losses in the cases in which the distress is clearly and directly caused by governmental policy.
- Exactly the same kind of treatment of distress as of poverty in other respects: direct grants in the short run; policies to foster the mobility of resources in the long run.
Class 4: Consumer and worker protection
Since unpunished fraud is profitable, it must be punished. I doubt whether many people realize how strong are the remedies provided by traditional law, and in particular how effective the actions of people who have been defrauded. I am confident that research in this area would suggest methods of vastly increasing the role of self-policing in the economy.
It is otherwise with the alleviation of consumer incompetence: the belief is becoming strong that there is much fraud, or at least indefensible waste, that consumers are incompetent to discover. This belief is reflected in the Truth in Lending bill* that Senator Paul H. Douglas has been seeking. Even if this belief is well founded, my basic answer to this painful problem is: in order to preserve the dignity and freedom of the individual in my society, I shall if I must pay the price of having some fail wholly to meet the challenge of freedom. I find it odd that a society that once a generation will send most of its young men against enemy bullets to defend freedom will capitulate to a small handful of citizens unequal to its challenge.
This basic position does not imply that we should accept the institutions of 1900, or 1963, or any other year, as ideal in the protection they have given to men against fraud and danger. We should be prepared to examine any existing institution, or any proposal for change, with an open mind.
We should not, however, simply assume that there is a useful law for every problem, and we should not lazily accept remedies that take freedom from 97 men in order to give protection to three.
I should add, since I introduced the question, that I am in favor of truth in lending, and also in borrowing, and in selling, and in campaigning for office, and in lecturing to Swarthmore students, but not in courtship. Senator Douglas’s bill has my support the day he shows me, first, that it will achieve any significant results, and second, that these results are worth at least 10 percent of the social costs of enforcing the statute.
These classes do not exhaust the range of functions undertaken by modern states, but they will suffice to illustrate the positions that seem to me to best meet the values of our society and the known limitations on its political processes.
I consider myself courageous, or at least obtuse, in arguing for a reduction in governmental controls over economic life. You are surely desirous of improving this world, and it assuredly needs an immense amount of improvement. No method of displaying one’s public spiritedness is more popular than to notice a problem and pass a law. It combines ease, the warmth of benevolence, and a suitable disrespect for a less enlightened era. What I propose is, for most people, much less attractive: close study of the comparative performance of public and private economy, and the dispassionate appraisal of special remedies that is involved in compassion for the community at large.
*The Truth in Lending Act was signed into law by President Lyndon Johnson in 1968, two years after Senator Douglas was voted out of office.
George J. Stigler, the 1982 recipient of the Nobel Memorial Prize in Economic Sciences, was the Charles R. Walgreen Distinguished Service Professor of American Institutions and director of the Walgreen Foundation at Chicago Booth. He died in 1991.
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