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Good paragraph, bad paragraph
The best riposte to Bill Kristol comes from Hayek. He pointed out years ago—sorry, don't have time to track down the citation—that the idea of small government was vital even if there was no prospect of its ever being achieved. So powerful and varied was the pressure in and on government for every kind of new spending that an automatic barrier was necessary to prevent the fiscal river sweeping all before it. A general prejudice against higher spending and taxes served as such a barrier. It might not prevent all or even most spending, but it would stop some. It would compel the government to think through its spending priorities and to confine them all within or nearly within taxable capacity. And though the government would probably grow anyway, it might grow less because of the prejudice that it should not grow at all.
If we were lucky, a barrier might even gain a quasi religious status over time, as the Gold Standard did in England until the first world war, and instill in voters the fear that tampering with it would be an impious act or even simply impossible. This worked for quite a while. When the Tories floated the pound in 1931, a former Labour minister, Lord Passfield (aka Sidney of Sidney and Beatrice Webb) said: "They never told us we could do that."
That is from John O'Sullivan. The question is whether the worrying paragraph undoes the goodness of the good paragraph. England, of course, would have done better to go off the gold standard much earlier than it did, or if it had not revalued the pound at an artificially high rate after the first World War.
Posted by Tyler Cowen on December 10, 2008 at 05:36 PM in History, Political Science | Permalink
Comments
I think this might be a good time to dust off your reading notes on Michael Oakeshott, Hayek's friend and admirer, the skeptic of skeptics. Much as he admired Hayek, he did say that he thought that H was a bit susceptible to fetishism from time to time himself.
Maggie Thatcher used to say that Oakeshott was her favorite philosopher, but I never heard Oakeshott say that she (or anyone else, for that matter) was his favorite politician.
Posted by: Buce at Dec 10, 2008 6:26:23 PM
The current state of affairs is an experiment in what happens when unthinkable policy options become thinkable (ie. take off some of the mental shackles of fiscal responsibility).
The handling of the bailouts (TARP & alphabet soup, carmakers, banks, etc) says to me that if there doesn't appear to be any downside to spending money, governments will do it. If there's a way to pay bills today with claims on the future, governments will do it.
Without some mechanism, even it's purely psychological or philosophical, there really is nothing to stop the fiscal tide and the tide is strong.
Posted by: diesel at Dec 10, 2008 6:29:37 PM
Are you connecting whether our government grows or shrinks to the U.S. having to devalue its currency somehow? I'm sorry, I don't see the connection between government size and going off the gold standard but have a lot of respect for you and would love to learn.
Posted by: LSK256 at Dec 10, 2008 6:33:58 PM
Tyler's point is that the idea in the first paragraph was good. The example the author gives is poor.
Prior to WWI, the currency was clearly over valued and the BOE had lots of trouble holding the pound even. Abandoning the Gold Standard as WWI started and in 1931 was best for the economy.
The author's point in paragraph 1 was that an attitude toward spending restraint is always and everywhere a good idea. A fixed exchange rate with gold is not always and everywhere a good idea.
Posted by: stanfo at Dec 10, 2008 7:11:35 PM
I think both paragraphs are bad. The second is bad for defending a bad policy. But the first one is worst, it is defending irrationality. It is saying that we need an irrational prejudice (small government) to compensate for an irrational bias. What we need is to know what is the optimal size of government and persuade the public of reaching it. Also control politicians. What we need is better science and more informed public, not more prejudiced ideology.
Posted by: jose at Dec 10, 2008 7:29:37 PM
Like some of the other commenters, I don't get why Tyler likes one paragraph but not the other. For one thing, the 2nd paragraph could simply be illustrating the mechanism, without necessarily claiming that the gold standard is worthy of quasi-religious status the way "small government" is.
But even if you do take O'Sullivan to be linking the two--and he probably is--why is that a problem? There is an obvious link. Tyler says it would have been better for England to have gone off gold earlier than it did, or to have not revalued at such a high rate.
But it would have been even better still had England never abandoned gold in the first place. This would have limited the growth of its government during World War I, and one could argue that in this alternative universe, Germany wouldn't have suffered a crushing defeat and thus WWII would have been averted.
Now maybe what Tyler is objecting to is not "gold standard" versus "small government," but rather "quasi-religious devotion" versus "general prejudice." To me it seems a matter of degree. Presumably you want people to support small government because there are some serious moral and practical consequences that follow if they don't do so, and it seems the best thing to do is take those options off the table altogether, sort of like torture.
Posted by: Bob Murphy at Dec 10, 2008 7:55:35 PM
jose: rationality is overrated, as watching the financial markets lately must surely emphasize.
In any event the extent to which rationality governs our actions is also vastly overestimated. Of course it is rational people who estimate this, so you could say that it is professional deformation.
Posted by: David Hecht at Dec 10, 2008 7:58:28 PM
Clearly, things would have gone better had there been no First World War!
Posted by: Frank at Dec 10, 2008 8:04:29 PM
BTW does anyone know what Kristol wrote to provoke O'Sullivan's post? Isn't it sorta blogging etiquette (if not an outright quasi-religious rule) that you can't start a post the way O'Sullivan does, without providing a link?
Posted by: Bob Murphy at Dec 10, 2008 8:12:27 PM
This might be a tad too cynical, but it seems to me that in times of crisis the government gets busy and tries to reward the people who showed allegiance to it over the years. So if it needs to take money away from non-union businesses and give it to union ones, it will do that, etc...the fact that such actions make the crisis worse is irrelevant because the goal is to reinforce loyalty in the government and its institutions. The more it will be clear who was saved and who was kicked back onto the Titanic, the stronger government support will be in the future. I'm not saying that individual people are acting this way consciously, but maybe this could be a spontaneous mechanism.
Posted by: Unit at Dec 10, 2008 8:32:40 PM
In a world without WWII Germany gets ICBMs two decades before anyone else and Einstein probably keeps his hypothesis of nuclear weapons to himself initially...USSR attacks south and Germany firebombs every hostile airbase on Earth. Neutral Japan owns the Pacific/Indian Ocean and becomes the most industrially powerful nation on Earth when USA invents long range bombers and counter-attacks Eurasia from secret airstrips in Northern Canada. Germany invents synthetic oil and begins firebombing Japanese oil infrastructures along with American cities. Japan is contained and USA is desparately trying to invent nukes while USSR begins probing the California coastline with amphibious assaults. There are two million German troops on the Eastern Seaboard and USSR infantry are 30 miles away from Los Alamos when a massive American nuclear counterattack is launched. A nuclear winter is triggered. USSR declares peace and the North American network of tunnels triumphs German oil military just long enough for everyone to starve.
Anyway, the reflexive like of small government is probably a reference to lobbying. To my knowledge this is done behind closed doors and there are rules to be followed. Can't these rules be changed so there is a frank and transparent discussion with those American citizens most hurt by pork (in a simplified analysis all those Americans hurt by inflation). If lobbying weren't secret (except in select national defense instances), the threat would be the Congressperson who takes pork might suffer voter backlash.
An example, Canadian oil sands player lobby DC to accept a guaranteed quota of dirty bituminen. Youth, recent immigrants from Africa/Asia/India with families at home, and citizens of already arid states would be hurt most by future AGW. Have some students, some recent immigrants from Africa, and some Arizonians participate in a the lobbying process public.
Another example is TARP. Seniors on fixed incomes would be hurt by inflation. Have some angry grannies with purses sit beside bankers and see how many words those Rasputins whisper into Paulson's ears.
Posted by: Phillip Huggan at Dec 10, 2008 9:58:36 PM
jose - taking a cue from Buce, two Oakeshottian points about the "optimal size of gov't"
1)science(better or not) can't discover this, and
2)the rationalists who believe that it can and act accordingly in pursuit of a new and improved order are more likely to do harm than good
Posted by: Gil Stange at Dec 10, 2008 10:16:06 PM
When Leviathan is an elected body, the war of all against all has been transferred from the martial to the political arena. In this context, a preference for small government is the political form of pacifism.
Posted by: Cyrus at Dec 10, 2008 10:46:37 PM
Bob,
See here.
Posted by: Blackadder at Dec 10, 2008 11:00:15 PM
I'm with jose. Irrationality is bad. Sullivan seems to favor always supporting "x" because the expected value of x is greater than the expected value of ~x (where x=small government). That seems lazy to me. Wouldn't it be better to consider policies on a case-by-case basis, and support x when the value of x actually IS positive?
My analogy: It's healthy to exercise by running, except when it's so cold out side that you'll get sick. Since its only that cold a small proportion of the time, then by Sullivan's argument we should go running every day, without checking the temperature, since a strong prejudice toward exercise guarantees that we actually run on good days, and hey, we're right more often than not. Why not just check the temp and not run on cold days? Seems like a more rational solution to me.
Posted by: brian at Dec 11, 2008 2:03:48 AM
Considering policies on a case-by-case basis is expensive. Even bashing them religiously one-by-one gets tedious.
What we are seeing now is the market contemplating huge government policy errors when only some have them have been made already.
I'm with jose, too, but just because that sounds cool. What we need is as much irrationality as possible on the part of the the people who are wrong about the way things work. This is Democracy!
Posted by: Andrew at Dec 11, 2008 2:36:01 AM
England, of course, would have done better to go off the gold standard much earlier than it did, or if it had not revalued the pound at an artificially high rate after the first World War.
If it had gone off the gold standard, the government could have grown to much bigger proportions much sooner... If they knew, they could do that, they would have exploted it, wouldn't they?
Posted by: andy at Dec 11, 2008 2:57:50 AM
In regards to the running argument:
The point is that you should have a bias towards running everyday, just as you should have a bias towards small government. Whether or not you run is immaterial. More often than not you will.
Posted by: stanfo at Dec 11, 2008 2:58:06 AM
"What we need is to know what is the optimal size of government and persuade the public of reaching it."
And if it is impossible to know the optimal size of government?
"Also control politicians."
And if politicians cannot be controlled?
"What we need is better science and more informed public, not more prejudiced ideology."
And if we can't get better science or a more informed public?
Posted by: Doug at Dec 11, 2008 3:27:10 AM
By the way, the analogy he used was a barrier to keep the "fiscal river" from oversweeping everything. What you seem to be proposing is that instead of building a levy to keep the mississippi from flooding everything in its path, we simply determine the ideal number of raindrops to fill, but not overflow, the river, and then only allow that much rain to reach the river.
The whole point was that the sources of fiscal irresponsibility are so "varied and powerful" for every kind of new spending, that it would essentially be impossible to evaluate every expenditure and determine the ideal dollar amount to spend. Instead, there would always be more pressure coming in a million different directions from those interested in particular expenditures than those generally disinterested in expenditures could adequately address.
In such a situation, a general prejudice against spending, while not a PERFECT solution, may be the best ACTUALLY ACHIEVABLE solution, and therefore not irrational at all.
Posted by: Doug at Dec 11, 2008 3:36:59 AM
I propose the same bias against incumbents in general.
Every now and then one will surprise you, and chances are, you are not the kind of person who will miss it, despite your bias.
Posted by: Andrew at Dec 11, 2008 5:04:19 AM
"Einstein probably keeps his hypothesis of nuclear weapons to himself initially": that's an interesting rewriting of history.
Posted by: dearieme at Dec 11, 2008 7:38:21 AM
Staying "on the gold standard" -- which is a rules regime -- required that England NOT revalue the pound at an artificially high rate after WWI. "The gold standard" gets blamed for the non-gold standard actions of Churchill and England. Let's put blame where blame belongs.
"England, of course, would have done better to go off the gold standard much earlier than it did, or if it had not revalued the pound at an artificially high rate after the first World War."
Posted by: Greg Ransom at Dec 11, 2008 11:28:37 AM
Business as usual is itself a choice. A small government means more capital to businesses, as is happening under Republicans. So you get the asbestos companies, Haliburton, Exxon, fast food...
The living geopolitical world provides very good experiments about whether marginal dollars payoff better at various different levels of government and various industries.
China has low patent protection and knockoffs abound. The opposite of USA's pro-business position. Hong Kong and Taiwan even provide sub-experiments within China and the coastline is very different from the East. UK allows cloning and Europe will probably wind up losing the aversion to Frankenfoods after seeing they really aren't that scary.
Botswana is trying to set an example for Africa and there is only one South American nation that avoided crippling debt. Amsterdam proves weed is good.
Sometimes diversity is bad. Failed states that export anarchy, incompetant leadership that exports cholera (Mugabe and friends), a USA state that allows predatory credit card rates...
To categorically deny that the USA cannot gain cost efficiencies from health care or education spending just because it is government is silly. To categorically deny that market errors can never be fixed by government is silly. To categorically deny that America is too stupid to make advances that nations like Cuba have made, is insulting.
When a bank is faced with an onslaught of loan requests, they hire bankers to assess the credit worthiness of applicants. When a government is faced with an onslaught of lobbying or spending/saving ideas, they can hire the same type of people except with a view to maximizing quality-of-living of Americans. Market forces are one of many tools, at least outside of USA. If not tempered, wealth becomes the only means to wealth. That's where neocon ideology dies.
Posted by: Phillip Huggan at Dec 11, 2008 1:28:00 PM
"So powerful and varied was the pressure in and on government for every kind of new spending that an automatic barrier was necessary to prevent the fiscal river sweeping all before it."
If this statement were true, the US government's share of GDP ought to have grown steadily. But in fact, it's hovered around 20% for the past 50+ years. Why do grown-ups believe these ideological fairy-tales?
Posted by: pireader at Dec 13, 2008 10:00:06 PM
