Freeman

ARTICLE

Business and Government

OCTOBER 01, 1964 by W. ALLEN WALLIS

Dr. Wallis is President of the University of Rochester. This is a slight condensation of his remarks of February 18, 1964 at the University of Minnesota Symposium on Great Issues in Government.

One way to convey some of the flavor of my "position" or "ideol­ogy" is to give you a few quota­tions that I use frequently be­cause they seem to me both amus­ing at a superficial level, and at a deeper level to reflect important truths. I’ll mention three, and leave you to figure out their rela­tion to government and business.

First, there is the saying at­tributed to a popular nineteenth century American humorist that "What you don’t know won’t hurt you, it’s knowing so darned much that ain’t so."

Second, there is Murphy’s Sec­ond Law of Social Dynamics. This states that "If you just let well enough alone, things will go from bad to worse."

Third, a great deal of what is accepted as factual knowledge in present-day orthodox economics has about the same basis in fact as the conclusion of a certain bank teller, who reported that a bundle of dollar bills contained exactly one hundred bills, as labeled. The way the teller reached that conclusion was by counting some of the bundle. He started out "1, 2, 3, 4." After a while he got to "33, 34, 35." Then he came to "65, 66, 67, 68." But there he stopped, say­ing, "Shucks, if it’s right this far, it must be right all the way."

Now I’ll admit that it is going to take more time than you have right now to figure out what those stories imply about my position and ideology. Let me suggest that you forget them for now and try to figure them out later. In the meantime I’ll try another ap­proach—also indirect, but at least different. I’ll thrash around for some labels that I think have some meanings, at least to some people, at least sometimes, that might ap­ply to me, at least approximately.

One such label would be "Man­chester Liberal." Another would be "Chicago Conservative." In ac­cepting the term "liberal," how­ever, I want to hasten to refer you to its root meaning of liberty and freedom. I would reject the label "liberal" in its common contem­porary usage, which is roughly equivalent to "collectivist," "so­cialist," "statist," or "mercantil­ist."

Similarly in accepting the label "conservative," I would hasten to emphasize its root meaning in pre­serving. I would reject the mean­ing now coming to be accepted of "reactionary," "authoritarian," "fascist," or "elite-ist." What I would emphasize is not conserving the status quo and protecting ex­isting interests, but conserving the forces of progress, which are liberty and individualism. In other words I am a conservative in the sense that I want to preserve liberalism.

Opinions in the Twenties

Some things have changed a lot since the twenties. Some things have stayed the same. Nothing in the 1960′s is more like the 1920′s than the views people have about government and business. The only difference is an over­whelmingly important one prac­tically. Now, most people say the things, and politicians pursue the policies, that were confined in the twenties to social scientists, nov­elists, historians, journalists, min­isters, and teachers—to opinion leaders, in short.

The prevailing climate of opin­ion among these opinion leaders was, to put it rather baldly, that business is evil, inhuman, degrad­ing, and corrupt, and that busi­nessmen are malefactors, robbers, war-makers, and boors. No one, as far as I know, ever stated it that bluntly; but that is the common denominator that ran through the novels, the sermons, the essays of journalists, the plays, the car­toons, and the teachings of so­ciologists, political scientists, and historians. (Note that I omit econ­omists; their views on economics have always been out of step with the views of other social scien­tists, as well as out of step with the intellectual fashions of the day.)

Some of the more thoughtful and scholarly members of the in­telligentsia of the twenties and thirties (they referred to them­selves as "intelligentsia" before they thought of the less preten­tious designation "eggheads") pub­lished research studies in which they purported to show:

    that we had an "economy of abundance" (a phrase that played the role in the early thirties that "affluent society" played in the late fifties) in which old-fash­ioned scarcity economics had no useful role—was, in fact, mis­leading;

    that we were controlled by "America’s sixty families";

    that the principal cause of war is munition makers who idiotically delight in stimulating consumption of their product;

    that the American economy was built by "robber barons";

    that our natural resources had been wastefully ravaged and de­spoiled;

    that corporation managers have become, through a "mana­gerial revolution," a power unto themselves, beyond the reach of stockholders;

    that consumers and labor would be helpless pawns of busi­ness—"100,000,000 guinea pigs"—except for government protec­tion;

    that the economy would fluc­tuate wildly without government stabilization;

    that the Great Depression of the thirties represented a collapse of the enterprise system—a "crisis in the old order";

    that government measures in the thirties ended the Great De­pression;

    that there has been a "de­cline of competition" and a rise of monopoly;

    that wealth and income are becoming ever more tightly con­centrated;

    and, going back into history, that the birth of the modern economy in the Industrial Revolu­tion was a time of worsening con­ditions for the poor, for child labor, etc.

This list of a dozen or so pro­positions that were prevalent in the inter-war period could be ex­tended to great length. What I want to do is not so much dispute them as to point out that each is an assertion about facts. Each can be checked by careful, painstak­ing, and laborious research—re­search more careful than that of the bank teller I described earlier, and less quick to jump to conclu­sions.

These Propositions Are Open to Question

Now, as a matter of fact, each of the propositions I listed has been investigated—though not with the thoroughness and repli­cation that would be brought to bear on propositions of compara­ble importance in the engineer­ing or medical sciences. Not one of the propositions I quoted is es­tablished. I will not say that any of them has been proved false, be­cause all that I want to argue for my present purposes is that we rest our views and our policies about government and business on purported facts that actually are not established facts.

(I may remark parenthetically that, although it is irrelevant for this discussion whether these propositions are actually false, I formed my list exclusively of propositions which I think are widely believed and which, in my judgment, are indicated by the best evidence available to be false. But I repeat: All that I claim for the purpose of this discussion is that many widely-believed prop­ositions important for establish­ing policy are not in fact well enough established to justify bas­ing conclusions or policies on them.)

But even if we accept the pseudo-facts on which so much of the case for government interven­tion in business rests, we still have no basis for the conclusions reached. A curious feature of the work of the inter-war period which so strongly dominates our attitudes today is that nearly all of it purports to establish only a single proposition. That proposi­tion almost invariably is one or another of the many facets of the central proposition that our econ­omy and society are not perfect. From that a variety of far-reach­ing conclusions are drawn.

Now when I was a student at the University of Minnesota, I took some courses in mathematics. One useful thing I learned is that to find out which way a function is moving, you need to know more than just one point on it. To es­tablish that things are not per­fect is not equivalent to establish­ing that things are getting worse; yet that is the conclusion usually drawn.

When I was a student, I also took some courses in logic. I learned that in a syllogism it takes more than one premise to support a conclusion. Even if it were es­tablished that things are getting worse, it would not follow that the government could or should do anything about it. That conclusion would require an analysis of the likely effects of the proposed rem­edy, an issue that is seldom raised with any seriousness.

Now why do I go into all this methodology? When am I going to tell you what the government should do about business, if any­thing?

The Need for Skepticism and Fresh Evidence

Well, I am not going to try to tell you what to think about that subject. I am going to be satisfied if I can persuade a few of you to think about it. What I think my­self, and what I would therefore recommend that you think, runs so counter to prevailing precon­ceptions and patterns of thought that I would be wasting my time, except for the pleasure it might bring to any of you who tend to agree with me.

What I ask is that you take a reasonably open-minded view—even a positively skeptical view. Examine the basis for your beliefs about the facts of our society and economy. Scrutinize the analysis by which the facts lead to the conclusions. Then check the con­clusions in fresh ways, by fresh evidence.

In refraining from telling you what to think, and just urging you to think, I am influenced strongly by a personal experience. When I first went to the University of Chicago as a graduate student in 1933, I had been reading The Na­tion and The New Republic reli­giously every week for more than ten years, and believing every word in them. One day at Chi­cago a professor brought to class an issue of The Nation, and read a brief paragraph which purport­ed to demolish the old saw that "You can’t change human nature." The professor analyzed the para­graph into two propositions. First, "Human nature has changed"; second, "Therefore, human nature can be changed." He pointed out that the argument was a complete non sequitur. It was not his point that the future may not be like the past. To clarify his point let me drop human nature and take up the weather. The logic, applied to weather, becomes "This week’s weather is different from last week’s; therefore the present weather can be changed by next week." Then "can be changed," already a non sequitur, somehow comes to mean "changed in speci­fied desirable ways by the govern­ment."

The Need for Analysis

Beyond these weaknesses of fact and logic there is another fatal flaw in most arguments for gov­ernment intervention in the econ­omy. That is the almost total failure to examine actual experi­ence with government interven­tion, to see what experience shows about the kinds of problems and the methods in which government intervention is successful or un­successful.

Back in the 1930′s, when I was studying at Minnesota, at Chi­cago, and at Columbia, there was perhaps more excuse than there is now for failing to analyze the rec­ord of government control, for at that time recent experience with intervention was limited. There wasn’t really much excuse, how­ever, because almost all human history has involved extensive government intervention, and the noninterventionist period of the nineteenth century was more or less unique. Furthermore, even in the nineteenth century nonintervention was only comparative; there was a good deal of experi­ence that could have been ana­lyzed.

But in the mid-thirties, inter­vention again became the prevail­ing policy, and now in the mid-sixties we have had more than a quarter of a century of experience that ought to be analyzed. Yet there has been no real analysis of this experience. We still operate on the faith of our fathers and grandfathers of the 1920′s, a faith rooted in wrong facts and bad logic.

Examine the Record

Of course, everyone realizes in a general way that the farm pro­gram has been a mess. How many know, however, that only a few commodities are regulated, and that those that are regulated are the ones that make all the trouble? And which way does the causal re­lation run, if there is one? Is it because commodities are regulated that they are troublesome; or is it because commodities are inher­ently troublesome that they are regulated?

Since the Federal Reserve Board was established 51 years ago, has our monetary system behaved bet­ter or worse, from the point of view of cyclical stability and eco­nomic growth? Have investors been taken to the cleaners less often or less severely since the Securities and Exchange Commis­sion was established?

Are consumers served better in states where public utility regula­tion is strong and effective than in states where it is weak or non­existent?

We have tried to set minimum prices and maximum prices, mini­mum wages and maximum wages. What have the effects been?

Some of these questions are only now beginning to be investi­gated, on a small scale. One of the leaders in this effort is a former member of the Minnesota econo­mics department, George Stigler, now president of the American Economic Association. Stigler summarized some of his tentative, preliminary judgments by giving five rules to be applied when judging what economic tasks a government can perform and what it can’t. Let me summarize Stigler’s five rules for you:

Rule 1. The government cannot do anything quickly.

Rule 2. When the government performs detailed economic tasks, the responsible authorities cannot possibly control the manner in which they are performed.

Rule 3. A democratic govern­ment tries to treat all citizens a­like, ignoring individual differ­ences.

Rule 4. The ideal policy from a government’s viewpoint is one with identifiable beneficiaries who each gain a lot at the cost of many unidentifiable persons, none of whom is hurt much.

Rule 5. The government never knows when to quit.

This concludes my message. I’m not trying to tell you what to think, I’m just trying to tell you to think. The reason I think I have so much to gain by just getting you to think is that widely ac­cepted arguments for government intervention in the economy are largely based on erroneous views of the facts, incorrect drawing of conclusions, and complete failure to examine the record of inter­vention. 

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October 1964

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