Mises Review 15, No. 1 (Spring 2009)
THE CASE FOR BIG GOVERNMENT
Jeff Madrick
Princeton University Press, 2009, 205 pgs.
A book entitled The Case for Big Government has a very poor chance of obtaining favorable notice in The Mises Review. But with my usual exemplary fairness, I resolved not to condemn the book because its thesis contradicted my own views. What if the author has arrived at new arguments that, even if they do not succeed in changing the mind of a confirmed libertarian, at least command our respect? And can one dismiss altogether the possibility that he will succeed in making his case? The author, after all is no rank amateur but a respected contributor to the New York Review of Books and a fellow of the New School's Schwartz Center for Economic Policy Analysis. Alas, Jeff Madrick is out of luck. His book rests on a fundamental fallacy, and advocates of the free market will profit from the book only through analysis of its mistakes.
When Austrian economists defend free-market measures, what is the underlying structure of their arguments? It is deductive: using certain economic principles, which derive ultimately from the action axiom, they endeavor to show that intervention in the free market will fail to achieve the ostensible goals of its proponents. Thus, economic theory shows that wage rates in the free market are determined by workers' marginal productivity. Minimum-wage laws that push wages above this point cause unemployment.[1]
The Austrian arguments, to repeat, are deductive. They are not statistical. Why not? Mises explains the issue with characteristic acuity:
Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. (Mises, Human Action, Mises Institute, 1998, p. 348).
History and statistics at best illustrate economic principles; they do not demonstrate their truth. Faced with statistical evidence that seems to contradict principle, Austrians do not abandon what has been demonstrated to be true. Thus, the famous study of Card and Krueger, purporting to show that minimum-wage laws need not cause unemployment, has not induced Austrians to abandon their arguments that these laws do indeed have this effect.[2] And most economists have agreed with them in this instance in refusing to set aside the verdict of theory.
Here exactly lies Madrick's fundamental error. His basic contention is this: defenders of laissez-faire contend that interference with the market has led to bad results. One cannot deny, though, that America prospered during the 1950s, '60s, and '70s. Yet in these years Keynesian and all sorts of other interventionist measures were in place. Does not history refute the free-market thesis?
But by the second half of the nineteenth century, America was fast becoming an industrial economy… But the economy on average grew no faster in those years — which saw deep recessions and countless strained and often ruined lives — than in the later years of the twentieth century, and in particular the twenty-five years after World War II, when federal, state, and local government spending reached roughly 30 percent of GDP and income levels in America became more equal. (pp. 22–23)
The problem with this line of reasoning cannot escape notice. How does it follow from the fact that America prospered in the post–World War II years that economic intervention did not impede economic growth? At most the statistical evidence shows that intervention was not immediately fatal to the economy; but defenders of economic freedom do not argue for this thesis. Their argument, once more, is that interventionist measures necessarily fail to achieve their goals. Growth, in the Austrian view, would have been greater without government intervention than with it. To refute this contention, Madrick would need to address the theoretical arguments in favor of a free economy; and he fails to do so. Madrick does not grasp this elementary point. He says,
Because in fact these high tax economies actually do well, it follows that what happens in the real world is that much of that tax money is spent constructively, on programs that inspire a sense of confidence, improve productivity, and promote good health and education. (p. 17, emphasis added)
Post hoc, ergo propter hoc.
Further, even on its own ground, Madrick's case is weak. Free-market economists contend that government spending and high taxes impede economic growth. Some studies, e.g., well-known work by Robert Barro, lend credence to these claims; but not all empirical studies do so.[3] Madrick does not respond, as a competent economist wedded to statistics would, by an analysis of the conflicting research. He has a simpler solution: he raises the standard that free-market advocates must meet. It is not enough, he says, that they show evidence that interfering with the free market has bad consequences; their evidence must be indisputable.
Another major claim of economists antagonistic to government programs is that social spending for programs like unemployment insurance, Social Security, and Medicare will … either undermine incentives to work and save or so displace private investment and business spending that they will reduce the efficiency and potential growth of the American economy … But when studies done by Barro and others that purport to show government's deleterious effect on growth or levels of income are probed by other experts, they do not hold up… In other words, slightly different assumptions or sets of data undermine the conclusions. Given how strenuously antigovernment researchers make their case, why is it impossible for them to prove it unambiguously? … the statistical evidence should be easy to demonstrate and virtually impossible to refute. (pp. 14–16)
Even if one rejects Mises's challenge to the importance of statistical reasoning, why should one accept Madrick's claim here? It is a complete non sequitur to claim that if there is a decisive argument for an economic conclusion, statistical evidence for that conclusion must also be decisive — unless, indeed, one allows no weight to anything but statistical argument. Further, if the statistical evidence is in fact ambiguous, why does this tell only against the free-market case? Why can one not just as well say that the case for Madrick's brand of interventionism is flawed, since his strenuous insistence on it should be supported by unambiguous statistics?
Not content with teaching us the lessons of the twentieth century, Madrick casts a backward glance through American history. Here once more the message is the same: economic growth and government intervention proceeded hand in hand. Although the free market has its place, we have never followed a complete policy of laissez-faire. Wisely so, he thinks, since subjecting people to the vagaries of an unregulated market would have been disastrous.
Of course, Madrick's historical argument fails for exactly the same reason as his contention about post–World War II prosperity. That fact that government intervened in a prosperous economy does not show that the economy needed that intervention to prosper. Moving a fallacy back in time does not make it better.
But it is not this point that I wish to stress here. Rather, in the course of his history lessons, Madrick makes some astonishing assertions. He counts as an example of successful government intervention the fact that federal land was sold or given to private individuals!
But there was another critical course Jefferson made.The broad distribution of land he thought ideal could be accomplished only through government control and regulation. The federal and state governments owned almost all the unclaimed land at the start of the nation, and Jefferson was among the early political leaders who were determined to be sure that land was sold at affordable prices and was widely owned. (pp. 33–34)
For Madrick, this counts as "a powerful use of government" (p. 35), because the land was sold in limited units at low prices. Never mind that land was being privatized; this still counts as an instance in support of government intervention and against laissez-faire. One wonders whether Madrick would count the dismantling of government enterprises in the Soviet bloc countries as examples of successful government programs that show the limits of markets.
If privatizing land counts as a government program, what counts as an example of the free market? As one might anticipate, Madrick here too has a topsy-turvy standard. He rightly deplores eugenic programs of compulsory sterilization, but he takes these to be a product of the laissez-faire ideology of social Darwinism:
Laissez-faire doctrine was dominant more or less until the turn of the [twentieth] century. British philosopher Herbert Spencer's popular theory of social Darwinism excused poverty as the natural state of a battle for survival of the fittest; those who were poor deserved it. Eugenics became the spurious, pseudoscientific justification for government-sponsored sterilization of people of undesirable genetic origins in many states. (p. 48)
Can Madrick really not know that supporters of laissez-faire opposed these programs? The eugenics movement stems from the Progressives whom Madrick admires.
In bemoaning the perils of a free economy, Madrick adduces the Panic of 1819:
The economic debacle that ensued affected almost all industries and regions in the nation, thus making the Panic of 1819 the first modern financial crash … The scenario would be repeated with regularity for the next one-hundred and twenty-five years, where financial excess and financial bust were constant characteristics, and recession, bankruptcy, and unemployment the inevitable painful consequences. (p. 66)
Only with Franklin Roosevelt did we begin to see our way out of this free-market mess, and even he did not go far enough. "But government spending [in the 1930s] did not reach levels as a proportion of the GDP that would have on their own lifted the nation out of Depression" (p. 56).
When I read Madrick's remarks, I thought to myself, "It would be too much to expect Madrick to be familiar with Murray Rothbard's The Panic of 1819. It is not one of Rothbard's most famous books, and those who are neither Austrian economists nor specialists in early-nineteenth-century American history would probably not have come across it." Imagine my surprise, then, when I turned to Madrick's endnote for his remarks on the panic. It consists of a citation to one book — Rothbard's (p. 184, note 2). Madrick apparently is unaware that Rothbard attributes the panic, not to the excesses of laissez-faire, but to bank-credit expansion.
But I must not be unfair to Madrick. His book does not rely entirely on the mistaken appeal to statistics and history that I have so far discussed. He sometimes does deploy actual arguments. He says, e.g., that even if high taxes affect adversely people's incentives, this may be outweighed by the benefits that the government programs funded by these taxes provide. Where would we be today without the national highway system and other government-financed "infrastructure"?
How does Madrick know that the benefits outweigh the costs? Without the taxes, people would have spent their money as they thought best. On what basis does Madrick claim that the government's decision represents a "better" use of the money? A key insight of Mises is that without market calculation, there is no way to determine how resources can be efficiently employed. How does Madrick propose to escape Mises's argument?
He addresses these concerns in one of the endnotes:
There is a large literature, especially among Austrian economists, on principles of coordination through markets. Some of this argues that government is inefficient at coordination. I [Madrick] find it remarkably unconvincing. (p. 183, note 98)
-->And that is that.
Madrick gives us in Part III of the book his suggestions on "what to do." Readers interested in the details should consult the book; but it will come as no surprise that massive increases in spending and taxes are the order of the day.
Can America raise another $400 billion in taxes, a total of 3 percent or so of GDP? … Regarding tax revenues, let's start with a potential tax on wealth, … It is entirely reasonable to raise $150 billion annually without great penalty to the nation's wealthy. (pp. 135–36)
Exactly what we now require: more and higher taxes. Madrick displays sufficient incompetence in reasoning to qualify as a chief speechwriter on economic affairs for President Obama. I commend him for this position, if he has not already been snapped up for it.
Comment on the blog.
This review originally appeared in The Mises Review, Winter 2009.
-->Notes
[1] For a detailed recent presentation of the Austrian view of wage determination, see Walter Block, Labor Economics from a Free Market Perspective: Employing the Unemployable (Singapore, 2008) and my review in Etica & Politica X, 2008, 2, pp. 232–35.
[2] Block's book gives a detailed account of the failings of Card and Krueger.
[3] For an example of Barro's work, see his Getting it Right: Markets and Choices (MIT Press, 1996), pp. 110ff. on the failure of the "demand multiplier." I discuss this further in The Mises Review, Spring 1997.
