Why Countries Never Thrive Without Activist Government Investment

History shows that economies have never grown through minimizing government involvement in the economy

Share with your friends

More share buttons
Share on Pinterest

By William Berkson

If there is one national goal that Americans can agree on, it is opportunity for all. However, the political parties have been sharply divided over the role of government in creating economic opportunity.

Since President Ronald Reagan, Republicans have advocated a simple and beautiful theory of how to grow the economy: the more you reduce government involvement in the economy, the more efficient markets become, and the more the economy grows. However, a beautiful theory can, as T. H. Huxley put it, be “killed by an ugly fact.” The beautiful theory of ‘free market’ or ‘laissez faire’ economics has, in the past 35 years, been killed not by just one fact, but by a torrent of contrary facts. Both Democratic administrations since Reagan—that of Bill Clinton and Barack Obama—have raised taxes, and under them, the economy grew more rapidly than under the tax-cutters Reagan and George W. Bush. Further, the “rising tide” hasn’t “lifted all boats.” The wages of the poor (the lowest 10%) have actually gone down 5% in real terms since Reagan took office, while in the middle, wages increased only by 6%. However, the top wealthiest five percent have had their wages go up over 40%. Also indicative of increasing wage inequality is that CEO salaries have gone from 30 times the typical worker in 1979, to nearly 300 times today. Since 1980, the only periods when the trend to greater income inequality has been somewhat reversed is under the Democratic administrations.

It would be reasonable to think that decades of contrary evidence, culminating in the financial crisis of 2008, would end the political viability of minimal government or ‘laissez faire’policies. However, in reality Republican candidates have not only continued to support these policies, but also campaigned on them to win the House in 2010, and the Senate in 2014. Finally, now in 2016, we may at last be experiencing a sea change in public sentiment. We can see it on the Republican side in the seeming indifference of Republican primary voters to the siren song of laissez faire; the candidates who expressed the most devotion to “conservative free market principles” lost.

Get Evonomics in your inbox

This election cycle is in fact a unique opportunity for progressives – a moment when they can actually kill the false and destructive narrative that the “free market” is the elixir of economic growth. Fortunately, some economic historians have, since 2008, written books with invaluable new documentation of what has actually grown economies. These books not only show that laissez faire policies have always failed to grow economies, but they also contain a clear rival vision for growing the economy—a vision that is completely grounded in and validated by economic history.

Survival of the unfittest

There are two reasons why laissez faire policies have survived against the weight of contrary evidence. First, though simply reducing taxes fails to increase opportunity for all, many other factors are also involved in economic growth and income equality. The distinctive contribution of tax reductions or tax increases is not easy to disentangle. Further, the relationship between economic models and economic reality never has been as clear and decisive as between theory and reality in the natural sciences. This fuzziness of economic theory has meant that there have been few knock-out punches against economic theories by evidence. And that has left the door open for arguments among economists that are, at least to the general public, arcane and inconclusive.

The second and more important reason for the survival of tax-cutting “free market” policies is that progressives have had no coherent rival theory or vision for promoting economic growth. Instead, they have focused on opportunity “for all,” supporting programs which simply counteract the inequalities that arise in market economies. These programs include social security, public education, health care, unemployment insurance, and an adequate minimum wage. Because our economy has, in fact, had strong trends toward economic inequality, and these trends have hurt the opportunities of the middle class and poor, these efforts have been much needed. However, the programs promoting equality are not a direct rival to the conservative theory of what grows the economy. And, as they say, “you can’t beat something with nothing.”

Compounding the lack of a clear counter-theory, Democratic Presidents have actually tried to coopt pieces of the laissez faire policies in order promote economic growth. In the name of growth, President Carter deregulated the banks—leading to the savings-and-loan crisis of the 1980s—and President Clinton refused to regulate the market for financial derivatives—leading to the financial collapse of 2008.

President Obama has been different, championing a more activist government, including financial re-regulation, Keynesian stimulus spending to pull us out of the Great Recession, new taxation for increased health care, and spending on infrastructure and Green Energy. However, even Obama has been unwilling to advocate or defend these vital efforts as a program for sustaining economic growth. In the 2012 election, rejecting the role of government in economic growth, he said that “biggest misperception” about him is that he believes that the “government creates jobs. … That’s not what I believe. I believe that the free enterprise system is the greatest engine of prosperity the world’s ever known.”

Both of these reasons for the persuasiveness of conservative free market policies have been destroyed by a series of new books on the history of economic growth. First, in place of “on the one hand on the other hand” economics, we now have some “always” and “never” economics. These histories show that economies have never grown through minimizing government involvement in the economy. Instead, they have always grown by government leadership through public investment—investment that, yes, grows jobs at all income levels.

Economic growth: the real story

The new books on the history of the growth of economies all have different focuses. But they have the same critically important policy implication: While the short-term impact of government spending is difficult to disentangle from other factors, government investment in the economy is what actually has grown economies in the long term. Successful long-term economic growth has never come from government getting out of the way of the private market. Growth has always come from government leadership that leverages private sector growth. Government investment in public goods and services, targeted and sustained over decades has in fact always been necessary for sustained growth of the private economy and increasing opportunity for all.

Recent books documenting the critical role of public investment include: Land of Promise by Michael Lind (2013), Success in Agricultural Transformation by Isabelle Tsakok (2011), State of Innovation by Fred Block and Matthew Keller (2011), and The Entrepreneurial State by Mariana Mazzucato (2013). And new this March, 2016:Concrete Economics, by Stephen Cohen and Bradford DeLong and American Amnesia, by Jacob S. Hacker and Paul Pierson. (Disclosure: Tsakok is the author’s wife.)

The center of the American story is the clash between the views of Alexander Hamilton and Thomas Jefferson. Hamilton believed that, as Lind puts it, “government is not the enemy of the private economy, but its sponsor and partner.” He believed in big government debt to finance economic growth, including the growth of industry and cities. Jefferson, in contrast, hated big government, big debt, cities and industry—and idealized small farmers and businessmen.

The very first clash between the two views is indicative of the whole story. DeWitt Clinton, a follower of Hamilton and the Mayor of New York City, wanted the Federal government to finance the building of an Erie Canal. The 400-mile canal would provide an alternative to the long, difficult overland route for Midwestern grain to reach the populated East Coast and Atlantic trade. Jefferson called the big government, massive debt canal proposal “a little short of madness.” When Clinton became Governor of New York, he circumvented the Federal government by getting New York State to launch a massive bond issue to fund the project. The year after the canal opened, in 1825, the price of Midwestern grain at New York harbor fell by 90%. The Port of New York boomed. New York City became the biggest city in the U.S., and for a time the biggest city in the world. The money flowing in also made it a financial and industrial center, helping to fund the industrial revolution in the U.S. So Jefferson wasn’t just a little wrong. He got it completely wrong, because the Erie Canal was the key to economic growth and the creation of the U.S. as a world economic power.

Subsequently, the U.S. has oscillated between periods of growth through Hamiltonian investment—under presidents such as Lincoln, FDR and Eisenhower—and periods of drift and stagnation, led by those, who, like Jefferson, idealized a fictive, idyllic small-scale past—historical leaders such as Andrew Jackson, William Jennings Bryan, and recent ones Ronald Reagan and George W. Bush, under whom wages stagnated. The creation and growth of the opportunity society in America is, then, not a story of small government leaving the private sector alone, but of strong, activist government empowering the private sector through investment.

Mazzucato’s book continues the story into the post-WWII period, where growth has been led by high-tech innovation. In one striking case study, she documents that all the technologies which made the iPhone “smart” were developed through sustained, massive government investments. These include LCD flat screens, multi-touch screens, lithium-ion batteries, GPS, communication satellites, the internet itself, cellular technology, SIRI voice recognition and more. It took a great private company with visionary leadership, Apple, to put them all together into a great consumer product. However, the vitally important but overlooked fact is that Apple was “surfing,” as Mazzucato puts it, on a wave of government-funded­­ and government-led research and development. “The State …is a key partner of the private sector—and often a more daring one, willing to take the risks that business won’t. …An entrepreneurial state … operates boldly and effectively to make things happen. Indeed, when not confident, it is more likely that the State will get ‘captured’ and bow to private interests [and become] a poor imitator of private sector behaviors, rather than a real alternative.”

Tsakok’s book pulls back to the wide view—the history of economic development worldwide. It documents all the successful cases of national transformation from traditional agricultural economies to modern economies, and many of the failed efforts as well. The ‘before’ societies consisted of largely independent farmers eating the food they grew—farmers who were literally dirt poor. The ‘after,’ transformed societies, are societies with commercial agriculture, growing crops primarily for sale. The transformed societies have high specialization and complex networks of interdependent individuals, schools, businesses, industries, research institutions, and government agencies. In these societies, farmers are much more dependent on finance, other businesses, and government—and are much richer.

So how many of the historical successes in economic transformation were driven by policies of minimal government involvement in the economy? Zero, zilch, nada. In every case, governments have made targeted investments in public goods and services, sustained over decades. These investments have always included education, infrastructure, research, and technology transfer to the private sector. But public investment is not easy; while it has proven to be necessary, it can still fail. In fact, all countries have had failures and setbacks in leadership through investment. What distinguishes the long-term successes from the continuing failures is, as the book Concrete Economics emphasizes, active, pragmatic government leadership. When programs fail, effective governments terminate them and try something else. Different successful countries have in fact succeeded with a large variety of institutional structures and policies. But all have had “government in the driver’s seat,” as Tsakok puts it. All the successful governments have led through targeted, sustained investments to create the modern, complex networks of interdependencies that empower high productivity and high income.

In sum, American and world history show that if you want minimal government, you can have it—but only if you want almost everyone in your society also to be a dirt-poor, subsistence farmer. If you want a prosperous, growing modern economy, you need high specialization and a huge, complex, interdependent network of individuals, businesses, research centers and education. And only government has the authority or money to regulate that network and to regularly pump in the targeted funds needed to sustain and grow it.

How progressives can win

Progressive candidates can consistently win elections with platforms advocating a policy of leadership through public investment. First, they can credibly promise opportunity for all, because, as we have seen, this is historically the only path to success. And they can credibly hammer conservative proponents of laissez-fairepolicies for advocating something that has never worked, even once, as a miracle cure.

Laissez-faire advocates harbor the false belief that money in the hands of the rich is always better for the economy than the same money taxed and spent on public goods and services. In reality, wise spending on public goods and services doesn’t “crowd out” private investment; rather it “crowds in” private investment, lifting it to a higher and more effective level—as was the case for the smart phone. The bottom line is that some of the money that a rich individual would spend on a bigger house would be better taxed and spent by government on public education, in order to promote opportunity for all. And some of the money that a car manufacturer would spend on a still higher salary for its CEO would be better taxed and spent on repairing roads and bridges—better for both the car company and for society at large.

Leadership through public investment is a vision that goes beyond overall growth. It is also a powerful argument to support social insurance and other “safety net” programs to promote opportunity for all. For governments can stimulate overall economic growth but still fail to grow opportunity for all. In fact, this is what has happened since Reagan. The actual Republican policies have been what Rep. Barney Frank called “weaponized Keynesianism”: huge deficit spending on the military, and starvation of other domestic spending. The result has overwhelmingly benefited the rich. To achieve broad-based growth in jobs and income, and opportunity for all, government needs to invest directly in education, research, health care and infrastructure, and also to fund social insurance and other ‘safety net’ programs.

Investment costs money, but as a country we have it. The U.S. is the richest country in the history of the world. In the 1960s, when top rates were 70%, we were both growing more, and more equally. With the current top rates at about half that, the historical evidence is that we have plenty of room to tax the rich more and publicly invest the funds to benefit all—including the rich, who in fact got richer faster in those high tax years.

The complaints that we are too broke to invest are not credible when rich individuals are stashing hundreds of billions in offshore banks, and corporations are not vigorously investing. Furthermore, when government has a clear purpose and role, it can do the opposite of what has happened under recent Republican administrations, with the capture of government by private interests and an orgy of corporate welfare and tax benefits for the super-rich. With a focus on investment, and with oversight and feedback, government can, as Mazzucato has pointed out, be more efficient and effective, so there is a virtuous cycle of taxation, wise investment and economic growth.

Get Evonomics in your inbox

The policy of investment empowerment solves a current, urgent problem of political messaging for progressive candidates. Currently Hillary Clinton, the likely Democratic nominee, has proposed many good policies, but has offered no compelling vision to unify them. In fact, the vision of public investment for the long term fits perfectly with her life-long focus on the needs of women and children. The well-being of the next generation is a responsibility that government—together with and in support of families—can take on. Corporations cannot fulfill this role, because they are pressed to benefit their investors in the shorter term. Only the government, representing the concern of its citizens for the well-being of next generation, can have the backing and the money to make the investments and to take the risks that promise only to pay off in the long term.

This vision of investing for the next generation goes directly against Donald Trump’s policies. For while he has been inconsistent on much of past conservative ideology, he has largely stuck to the bottom line of Reaganomics: give money to the rich through massive tax cuts, and don’t worry about the consequences. If Clinton directly attacks the idea of giving more money to the rich—more reverse Robin Hood—and urges that the same money be spent on education, infrastructure, health care, social security, and research, she will be on completely solid grounds historically. And she can show up Trump as part of the same con that conservatives have been playing since Reagan: funneling money to the rich on the grounds that it will benefit everyone else hugely—which it hasn’t, and won’t.

If progressives are to win back control of all branches of government, so that they have real leadership power, they need to put the opportunity society at the center of their campaigns. They need to make the case that public investment, wise regulation and the social safety net will together create greater opportunity for all Americans. And they need to relentlessly rebut the idea that a minimal government means a strong economy, and argue for the essential role of government leadership through public investment. Then they can actually win the argument, as Reagan once did on the other side. And then by wise government investments they can empower individuals and businesses, and can restore the American dream of opportunity for all.

Originally published here.

2016 July 25

Donating = Changing Economics. And Changing the World.

Evonomics is free, it’s a labor of love, and it's an expense. We spend hundreds of hours and lots of dollars each month creating, curating, and promoting content that drives the next evolution of economics. If you're like us — if you think there’s a key leverage point here for making the world a better place — please consider donating. We’ll use your donation to deliver even more game-changing content, and to spread the word about that content to influential thinkers far and wide.

 $3 / month
 $7 / month
 $10 / month
 $25 / month

You can also become a one-time patron with a single donation in any amount.

If you liked this article, you'll also like these other Evonomics articles...


We welcome you to take part in the next evolution of economics. Sign up now to be kept in the loop!

  • Shawn H Corey

    “…progressives have had no coherent rival theory or vision for promoting economic growth.”

    There is evidence for gov’t assistance.

    #money #profit

    In 1914, Henry Ford raised the wages of his employees from $2.25 to $5.00 a day. That year, he sold 300,000 cars, more than all the other car manufacturers combined. The next year, he sold 500,000 cars. With that base, the American economy when into an economic boon we now call the Roaring Twenties.

    After WW2, the US gov’t spent large sums of money on the G.I. Bill (1949)¹, the Marshall Plan², and the Japanese rebuilding³. These created the economic boon of the 1950s and 60s.

    ¹ G.I. Bill (1949):

    ² Marshall Plan:

    ³ Japanese post-war economic miracle:

    Giving money to those who will spend it creates an economic boon. Giving money to those who hoard it creates an economic bust.

    • Haris Iasonas Haralabides

      Your logic is flawed. There are no money hoarders to begin with. Wealth is either, (re)invested, consumed (acquiring of movable or immovable assets – the later are subject to depreciation – amortisation), or put to banks.

      Which of the above behaviours would you define as “hoarding”?

      I remind you that banks keep a 1:10 ratio of capitalisation while the rest participate in investing funds, is lent to entrepreneurs with good ideas, loans for housing, etc. So everything is put back actively into society and the economy. Where is the hoarding you describe?

      • Derryl Hermanutz

        Your understanding of what banks “do” is wrong. Banks don’t get money from depositors then lend some to investors. Banks create credit/debt: deposit account balances and loan account balances. Bank credit is 97% of the entire “money supply”. All of the deposit account money supply is owed “back” the the banks that created it as “loans” of bank credit. It is a zero sum balance sheet accounting equation. You conflate financial wealth — money savings and financial capital accumulation; with economic wealth — goods, services and assets that are bought-sold for money. The productive economy does not produce its own money supply. Governments are trillionaire bond-debtors, not trillionaire money-printers. Commercial banks create the money supply as “bank loans” and “bond purchases”. The value-adding productive economy produces net positve sum real economic wealth that is bought-sold with zero sum balance sheet credit/debt. Banks create, and debtors borrow and spend the deposit account money into the money supply. All bank loans create new deposit account money in the borrower’s deposit account, as a “credit” the bank types into the debtor’s deposit account. Bank account savings do not “fund” anything. If earners save the deposit account balances as their bank account savings or brokerage account cash balances, they are “hoarding” the money. Not that there’s anything wrong with building up the financial security of “having money”. But in the zero sum credit/debt commercial bank money supply system, debtors owe all the money “back” to their creditor-banks. So if savers don’t spend down their deposit account balances, debtors can’t earn the deposit account money supply “back”, and can’t pay the debts they owe to their banks. Unless new debtors keep spending new bank credit into the equation, which is why “growth” is critical: it forestalls recognition that a zero sum credit/debt money supply-issuing monopoly collapses in “financial crisis” when debtors can’t pay their loan account debts because savers are “keeping” most of the deposit account money supply, not “spending it”.

  • l777l

    “We as a country” have the money. Amusingly, that’s because the rich have the money and that’s because of the system the author decries. If he had his way, we as whatever would not have the money.
    It seems he doesn’t account for the fact that people move between income brackets over the course of their lives either. (Naturally, he doesn’t mention negative liberty.)

    • Eli Levine

      I believe he’s talking about enabling economic growth for the nation, rather than just the riches for a few. Reread the article?

  • Jeff

    This entire article is an exercise in the broken window fallacy.

    • Eli Levine

      How? Please explain.

      • Jeff

        Much of this article assumes that because state investment led to certain developments, that the state is necessary for these developments. Here is an article on one of these books that were mentioned:

        It also always seemed strange to me that leftists would support government subsidized economies of scale which leads to capitalism and power in the hands of businesses. He says that the anti-state position would leave development in the hands of the rich and would thus fail. But this isn’t the case at all. A true left-wing analysis of this situation would be very much against state interference on behalf of the privileged.

        • Eli Levine

          Jeff, from the right’s perspective, I believe the point of the article is that the theoretical business-led investment in technology and infrastructure has never really occurred in history, probably due to the relatively risk adverse nature of private sector actors working on long term, low margin projects that yield real economic prosperity in the long and short term for most people. There’s another possibility that these big projects that governments tend to need to fund and oversee may not be done as effectively by purely profiteering agents in the economy, as some cost savings may be fatal, or some revenue maximizing schemes may be ineffective at serving the purposes that these projects need to have in order to work well for general prosperity.

          From the left’s perspective, the benefits for businesspeople and businesses are what ultimately fuels the social, environmental, and economic investments the left loves. No prosperity for businesses, no opportunity to further develop, enrich, and enable people to do their best at life in a healthy social and ecological environment. The article does not assume away the left’s points, but ultimately argues that the enforcement of general economic inclusion in benefits (a key priority of the left) is what helps drive the economic engine for everyone, businessperson and employee alike. This is a hybrid model where governments make key investments in legal, physical, and technological/research infrastructure and then enforces a fair sharing of the proceeds in general well-being and reinvests in maintaining, expanding, and upgrading the infrastructure of the society and economy. Businesses depend on this due to a different set of priorities and perspectives from public sector agents that puts them perpetually at odds with their long term health and well-being.

  • Eli Levine

    I cannot like this enough! Excellent, comprehensive view of history as a data-set, rather than as a wistful abstraction, painted in the minds of conservatives. These are the facts. What will the Right do with them? Probably bury them under a pile of paperwork, ignore them, and leave the country and the world less well off than would otherwise have happened.

  • kenny

    This is a not really a fair description of economic policies as we’ve seen them, over the past 35 years, and the attempt to link anything to the political party of the president is rather embarrassing.
    By the end of the 1970s, the western economies were in terrible trouble. The enthusiasm to escalate the Vietnam war by the US government (Democrat JFK & LBJ), was finally reversed by a later, Republican, president, who’d pulled the troops out. The cost of this war had been huge, and had forced the taxpayer to take on a huge levels of debt, to pay for the war. This massive increase in debt had benefitted the economy at large, but, as with all non-productive debt, much of the benefit stopped when the borrowing stopped.
    Subsequent presidents, of whatever party, simply increased the scale of the problem. The Clinton presidency doing by far and away the most harm by removing the key financial regulations, in the Gramm-Leach-Bliley Act (1999), enabling the Wall street excesses we’ve seen over the past 15 years.
    The Obama government has set in concrete the position of Wall Street, with ‘Too Big To Fail’ and ‘Too Big To Jail’.
    The current political and economic cross-party consensus – the neocons – are nothing to do with free markets, being focussed on the creation and protection of increasing income inequalities via financialised monopolies and oligopolies.

    Government investment is not more inherently good or bad than private investment is. It always comes down to what the investment is in. Wars are often credited with being good for economies, which is generally reasonable statistically, but the reasoning is always political. Wars are often good, not because buckets loads of money are pumped into the economy, but because they have often caused millions of workers to train in high tech engineering and manufacturing, so after the conflict ends, the country has millions of these people looking for work. Guess what happens. See (Shawn H Corey above re GI Bill etc).

    The same sorts of arguments apply to private investment. If the incentives are in the wrong direction (the last 25 years), then all the private borrowing pours in to asset speculation, which therefore goes up while the borrowing continues, and collapses when it stops. If the incentives were better aligned, private companies would be investing in wealth generating activities. Elon Musk bucks the trend, and lives in this world, but he is one of very very few.

    The ‘financial economy’ accounts for 40% of the economy (or something), and is, to a very large extent, a zero-sum game. This position seems to have the absolute support of both parties. It will, of course, end very badly for the poor schmuck.

    • Haris Iasonas Haralabides

      I agree with most of your points.

      However, I wonder why you conclude that financial products participate in a “zero-sum game”? When new wealth is created and added to circulation it creates new opportunities for all at a geometric progression.

      Finance and its products are not excluded.

      Derivatives, stocks, etc, are all legitimate tools for businesses and if used correctly (it depends on the company’s management) may give profit and development for all who participate and the economy. That’s how there is a continuous improvement in the standards of living worldwide. If 40% of world’s economy was just slacking or participated in a zero sum game there would never be such tremendous economic progress everywhere.

      IMO, What actually hinder economies is overregulation.

      P.S. Actually government investment has an inherent problem over private investment. The former deals impersonally with other people’s money while the later with its own assets. Big difference!

  • Louis Shalako

    If you want an example of activist government investment in the economy, check out Canada. The greatest country in the world.

  • There are a host problems with this article. The most prominent is that just because something has always happened (e.g. government investment), doesn’t make it a necessity (for thriving). America had thrived without women voting for a long time, but that did not make the lack of women’s suffrage an essential element of its success.

    Most of the potential theoretical supports are shot through with canards like:

    — “Laissez-faire advocates harbor the false belief that money in
    the hands of the rich is always better for the economy than the same
    money taxed and spent on public goods and services.” Absurdly untrue, who holds this belief besides anarchists. The dispute is at the margin over whether additional investment is worth the cost in taxes or alternative uses and about whether things are really public goods rather than sops to political allies when such investments are actually made.


    — “Investment costs money, but as a country we have it.” National wealth is not sitting idle in bars of gold waiting to be used. It represents ownership of assets that are already a work doing something else. To put them into a government investment requires taking them away from that other use,

    • Eli Levine

      DW, I think the point of the article is that private hands will never substitute public investment because of different behaviors and perspectives by businesspeople in the economy (see my comment above). Also, the public sector using resources that are produced in the private economy to improve the private economy beyond what groups of for-profit businesspeople will do is not really wasted, because you get all the research, social, and physical infrastructure that’s needed to help an economy develop and grow. The article is advocating for a combined approach to policymaking for the economy that’s far from laissez-faire, but still let’s consumers and producers do decentralized exchanges. The article points to the evidence. Do you have any from the real world that’s not just thought experiments and theories?

      • The evidence cited generally involves conclusory summaries of the work of other left-leaning authors that have had their points effectively refuted. (See, e.g. and Jeff’s links above) Of course effectiveness is in the eye of the beholder, but the point is that these are hardly uncontested.

        So is apart from that, does the article make a plausible case? No. Because it relies on logical fallacies. In addition to the one I identify, Jeff accurately identifies this article as example of Bastiat’s broken windows fallacy in that you do not see what would have happened had resources not been used by government for its “investment” projects. The lack of actual counterfactuals makes this sort of historical analysis fraught.

        That being said, I think you can make a good theoretical case for government investing in true public goods like basic research. The problem is that in reality governments often (not always!) do a terrible managing such investments for a host of reasons: lack of knowledge (in the Hayekian sense), politicization of investment decisions, etc.

        The interesting (and hard to answer) empirical question is whether government investment in such public goods is worth the costs imposed by the fact that the government is making such investments. In some cases the answer is probably “yes” and in others “no”. Is there a good means of distinguishing those cases ex ante?

        • Eli Levine

          I believe I addressed Jeff’s points in my comment for him. We actually have a neat case where we can look at counterfactual evidence in the US during the period before the Civil War. The American South was primarily cash crop agrarian and favored laissez-faire, while the American North had activist government involvement in creating technological and infrastructural advancements. By the time of the Civil War, the North had outstripped the South in overall output, population, and consumption, which set it on course to being the winner of the Civil War despite superior Southern military leadership. We can also look at the specific evidence cited by the books the author used in the article to see similar patterns elsewhere where complete laissez-faire leads to stagnation, unequal outcomes in wealth and opportunity, and generally a less wealthy society than would otherwise have been. The Cato Institute is hardly a source known for unbiased research, and your own dismissing the author as left-wing itself doesn’t help to improve your case. I’m looking for hard evidence, not hypothetical conjectures about counterfactual evidence that is, actually, present in the original text. The evidence seems to point to a hybrid of policies and positions that discredits both the right-wing/Libertarian laissez-faire side and the left-wing centralized planning side.

          • You seem to misunderstand most of the points made:

            — I don’t think you addressed Jeff’s point at all (the broken windows fallacy).

            — Using the example with respect the Civil War actually supports my point that counterfactual historical analysis is too difficult to productively engage in a forum like this: does anyone really believe that the divergent fates of the North and South were due mostly to differing industrial policy?

            — My point was not that Cato was right and the left wing authors cited cited by Berkson were wrong, rather that the fact that he cites authors does not mean that he has ALL of the facts on his side. I believe the free-market types have the better of the empirical arguments, but that is not going to be settled here.

            The best you will do in this forum is to look at whether the arguments make sense or are prima facie persuasive and Berkson’s piece fails by both criteria for all of the reasons cited above by both Jeff and me.

          • Eli Levine

            I don’t see how the broken windows point is valid, because the government created things that otherwise wouldn’t have been there, rather than add value to what had previously been destroyed. I do think that the different economic policies of the North and South created the divergence of fates that we’re still seeing play out at present. What empirical points do you have that demonstrates that free-markets led by business is superior to free-markets led by public sector investment and oversight? Why assume problem traits about governments that don’t have to be present, and that also crop up in any large organization, public or private? Having read some of those titles, I can assure you the prejudicial left-wing biases weren’t present, but rather a bias to finding evidence to solve a common problem post facto.

          • I think most of your response has been answered in the posts above. However, it appears you (and perhaps others) have a misconception about what the broken windows fallacy is (at least in its application here), so this link:

            The general point of the fallacy is that you can’t ignore the “unseen” opportunity costs. It not linked to destruction except in the specific parable. The application in this instance is that the author ignores what resources would have been used for if not used by the government.

          • Eli Levine

            DW, I think the point of the article is that we’ve seen what happens when resources are kept primarily in the private market: they don’t produce what the public sector has produced by using the resources. To paraphrase the author: you can have laissez-faire policies of you’re ok with most people being subsistence agrarian farmers and urban workers. That’s where the US economy is headed under the neoliberal consensus that emerged from the eighties and seventies.

  • Haris Iasonas Haralabides

    The following is part of a discussion that took place in FB with the author of this article.

    “I will have to disagree with you.

    I started reading your article but didn’t have to read it all to figure out that most of it is based on your assumption that the data that you provide is directly linked to the presidents at that time.

    That’s an assumption which is a tell-tell sign that you neglect a basic macroeconomic fact.

    First and foremost in macroeconomics you will never see immediate results (another profound political handicap for those politicians that support libertarianism). The positive or negative consequences are becoming evident after years or even decades after a policy is applied.

    It took a decade to expose Greece’s vulnerability in how it used the new currency (neo-Keynesian policies). Nevertheless, Greece is a small country and everything appears faster than in the US.

    Isn’t it logical to infer that a slow-moving entity like a big country’s economy will take considerable time to gain momentum?

    Therefore, the efflorescence that was observed in the Clinton administration was actually set-up by the laissez-faire that Reagan established.

    But US economy isn’t a very good paradigm to begin with, because your society – I assume you live there – has concretely established a baseline of laissez-fair activities that you will never be deprived of. So whomever the president in the US, society will never revert to socialism (means of production to the state), or extreme interventionism.

    It’s an individualist culture and that’s why it thrives and leads the world in almost everything. (For me the greatest social experiment humanity has ever seen and it goes extremely well – I may add).

    Of course the US experiment has its shortcomings, which Dr. Friedman had extensively addressed in his lifetime’s work. Public schooling, for example, would benefit greatly by his coupon proposal, a proposal that is used in virtually copy-paste form, as we speak, in Sweden (since the 90s). It goes really well. That would improve ghetto-quality schooling.

    If we are to continue this debate we should talk extremes; extreme laissez-faire vs extreme statism.

    To me it’s a water vs poison debate.

    I remind , that one can poison himself by drinking too much water. No purist ideology is possible to survive real world conditions. Everything should be used as an instrument. Libertarianism is a path not an instrument of intervention. Classical Keynesianism was meant to be an instrument not a path (did you read “Keynes versus Keynesians”?).

    So,lets talk about China which is a very special case indeed. It’s a country that lived for thousands of years under deified emperors.

    In the last century the Kuomintang ruled harshly and people craved for communism that was spreading the doctrine of social equality, equal opportunity, promises for one social class with no exceptions, equal wealth distribution, no favouritism.

    Under Mao’s orders, following the defeat of the Japanese invasion in Manchuria, the communists treated the ordinary people of China fairly, the women rose in the societal ladder, everything looked and felt better. Thus, it was no surprise that the communists prevailed in the civil war.

    Alas! It proved to be the cheese in the trap!

    Mao’s rule became increasingly tyrannical and unfree.

    The Great Leap Forward (an ironic name -given by Mao himself – the new untouchable deity of the land) aimed to give a boost to China’s industrial development by making people melt all metals, in their possession, that could be used for industrial production and surrender the byproducts to the state.

    China was then an agricultural economy. Mao’s unintelligible inspiration led to a great famine where millions died. When, Deng Xiaoping with his famous “black cat, white cat (it matters not) an long as it catches mice” and Liu Shaoqi opposed Mao’s central planning of the economy and opted for a more laissez-faire approach, Mao retaliated with his Cultural revolution when again millions died from political prosecutions. (“Wild Swans: Three daughters of China” – a book STILL BANNED in contemporary communist China – is an excellent source of historical progression of the country in the last century. I highly recommend it).

    The above example highlights how central planning leads to undesirable outcomes and may cause an avalanche of events, even more detrimental. The original idea was plausible but central planning really created mayhem.

    After Mao’s death, the ideas of Xiaoping were put to use, privateers were given back incentives to create wealth and even though it hasn’t yet reached the levels of freedom of the western world , China is on the right track. I predict that as the Chinese middle class becomes wider and more prosperous communism will eventually fall, democracy will be established.

    Friedman’s advocation was that it is impossible to have tyranny ruling over economically independent citizens. In Chile, Pinoset’s fall was an inevitable outcome after adopting laissez-faire approach. It is still one of the most stable democracies and best economies in Latin America.

    Let me point out here that I see a great correlation (I would dare to say “almost direct”) between the index of economic freedom and that of democratic status. The more “laissez-faire” an economy the more democratic it becomes. Compare the two links below:

    On the other end of the spectrum from China, we had Hong Kong, the English protectorate with Chinese consisting the population but a laissez-faire economy. It thrived.

    The same can be said about West Germany and East Germany with Adenauer’s free policies on the one end and the Soviet central planning on the other. History has amply shown that people migrate from “central planning” to “laissez-faire” situaltions if given the chance. NEVER THE OPPOSITE.

    That should tell a lot in itself.

    P.S. I could support the above argumentation on the neurological level (where there is good evidence that central planning is the byproduct of left-brain dominance and its craving for control over chaotic dynamics – a task bound to fail), but I’m done for today.


    Haris Iasonas Haralabides”

  • Derryl Hermanutz

    In 1841 Friedrich List made the same observation in his “National System of Political Economy”, which he published in opposition to the “popular school” that had arisen around a narrow reading of Adam Smith’s Wealth of Nations. Anybody who has read Smith knows his free market — populated by family farmers, trades and craftspeople, village merchants, and “factories” where a guy and a few helpers used hand tools and steam-powered machines to make a lot of stuff real fast –was a utopia envisioned as an antidote to the actual political economy of 1776 Britain: state-corporate mercantilism. List points out that every nation that has historically developed its economy, has done so with explicit state participation. In the 1840s the British Royal Navy shelled Chinese cities to encourage them to re-think their opposition to the British opium trade. Read Smedley Butler’s 1935 booklet, War is a Racket, about how the US Marine Corps was used to advance the interests of US state-corporate mercantilism. Paul Kennedy’s 1984 book, The Rise and Fall of the Great Powers, makes the case that over the past 500 years the increasing state military cost to maintain a mercantile empire eventually undermines the nation economically, and a new great economic power emerges to supplant it. You can argue with economic theories. But you can’t argue with what has already happened. Economic history is a one way street.

  • LuisUreña

    Intellectual dishonesty. Once again, a endless steam of verbiage to say this: I think taxation solves everything. The incompetent goverments with its boat-saving (taxes of course) money to the banks are what causes the crashes. And big goverment means, always, crippling debt, and dubious use of wealth. Youre just washing yourself with the money of your children. But youre a leftist, goverment is what the Left want… for a variety of purposes (some of them quite shady). Like you said: “If progressives are to win back control of all branches of government.” Too bad for you less and less people believe you, thats why you lost the elections.