The Public Verses the Private Sector


W. Allen Wallis is President of the University of Rochester. This article consists of excerpts from the opening chapter of the forthcoming volume, The New Argument in Economics: The Public vs. the Private Sector, edited by Helmut Schoeck and James W. Wiggins, and to be published this spring by D. Van Nos­trand Company as part of the William Volker Fund Series in the Humane Studies.

The discussions, written and oral, of the public versus the pri­vate sector that have drawn at­tention to this issue—or, rather, that have created the impression that there is a specific issue here—picture a society in which ex­penditures on schools, sanitation, care of the indigent, public health, highways, communication sys­tems, churches, science, and the higher forms of art, music, drama, and literature, are in squalid de­cline as a consequence of serious reductions in the funds available. The facts are just the opposite. There has been tremendous accel­eration in the past decade in build­ing schools, increasing teachers’ salaries, building superhighways, supporting science, aiding the needy, conquering disease, clearing slums, building hospitals, building churches, publishing books, per­formances by symphony orches­tras, attendance at art galleries, and innumerable other worth­while public activities. Growth of public expenditures since the Ko­rean War has been great and the growth has been mostly in public services—in the "welfare state," not in national security.

Those who argue that the pub­lic sector should be increased often define the public sector implicitly not even as everything that is paid for by the government, but as only that part that is provided directly by the government through gov­ernment employees using govern­ment-owned facilities. They are thus arguing in effect that the pro­vision of certain services should be transferred from private to public hands.

Churches are a good example of a public facility that in this coun­try is provided exclusively by pri­vate funds. Even the most ardent advocates of transferring the fi­nancing and control of public fa­cilities from private to public hands stop short of advocating this transfer with respect to churches, presumably because of ingrained belief in separation of church and state. Private institu­tions of higher learning are an­other case in point. In this in­stance, perhaps the principal rea­son that the "unmet social needers" usually stop short of ad­vocating transfer to public con­trol is that many of the most im­aginative of them are employed by private universities, and their most valuable economic freedom is academic freedom. (It should be noted, however, that public financ­ing of political parties is occasion­ally advocated; and this would be more dangerous to our political liberty than public financing of religion would be to religious lib­erty, or than public financing of higher education is to academic freedom.) Indeed, the "public squalor argument is," as I have said on another occasion, "simply this decade’s battle cry of social­ism, which—intellectually bank­rupt after more than a century of seeing one after another of its arguments for socializing the means of production demolished—now seeks to socialize the results of production."

Tocqueville pointed out in 1840 that democracy in America seems to cause the pressures to solve a problem to mount as the problem itself dwindles. Tocqueville ap­plied this particularly to in­equality.

"The hatred which men bear to privilege increases in proportion as privileges become fewer and less considerable, so that demo­cratic passions would seem to burn most fiercely just when they have least fuel. I have already given the reason of this phenomenon. When all conditions are unequal, no in­equality is so great as to offend the eye; whereas the slightest dis­similarity is odious in the midst of general uniformity; the more complete this uniformity is, the more insupportable does the sight of such a difference become. Hence it is natural that the love of equal­ity should constantly increase to­gether with equality itself, and that it should grow by what it feeds on." (Mentor Edition, p. 294)

From Affluence to Equality

This burning-most-fiercely-when-the-fuel-is-least seems to operate in much of our social spending on welfare measures. Only after substantial success was beginning to be achieved in pro­viding retirement income, through individual insurance and private pension plans, did pressure for public provision of retirement in­come build up to the point of com­pulsory federal provision of funds for old age. As the problem of medical care for the aged has steadily diminished, partly be­cause of improved health of the aged, partly because of higher per capita income which has made it easier for people to provide their own resources for old age and to care for their aged relatives, and partly because of the wide in­crease in organized saving for re­tirement, pressure for some form of governmental program has in­creased. Similarly, in the case of race relations, only after rapid progress finally began to occur through private means did serious pressures grow up for govern­mental compulsion. There are many other examples of the same kind.

Tocqueville makes two other re­marks that are particularly help­ful in understanding the current pressures for expanding collective action and diminishing individual action:

"As conditions of men become equal amongst a people, individ­uals seem of less, and society of greater importance; or rather, every citizen, being assimilated to all the rest, is lost in the crowd, and nothing stands conspicuous but the great and imposing image of the people at large. This nat­urally gives the men of demo­cratic periods a lofty opinion of the privileges of society, and a very humble notion of the rights of individuals; they are ready toadmit that the interests of the former are everything; and those of the latter nothing. They are willing to acknowledge that the power which represents the com­munity has far more information and wisdom than any of the mem­bers of that community; and that it is the duty, as well as the right, of that power, to guide as well as govern each private citizen." (Mentor Edition, p. 291)

"Every central power, which follows its natural tendencies, courts and encourages the princi­ple of equality; for equality singu­larly facilitates, extends, and se­cures the influence of a central power.

"In like manner, it may be said that every central government worships uniformity; uniformity relieves it from inquiry into an infinity of details, which must be attended to if rules have to be adapted to different men, instead of indiscriminately subjecting all men to the same rule…. The faults of the government are pardoned for the sake of its tastes; public confidence is only reluctantly withdrawn in the midst even of its excesses and its errors; and it is restored at the first call." (Mentor Edition, p. 295)

Other Factors Contributing to the Growth of Collective Action

In addition to the points made by Tocqueville, two other factors seem to me to contribute to the growth of collective action.

The first of these is failure to diagnose a problem and failure to analyze the consequences of a proposed solution, or else wrong diag­nosis and wrong analysis. The provision of retirement income through a federal social security program, for example, began shortly after the Great Depression, and it may well be that hard­ships of the aged that were in fact due to that depression were attributed to inadequate provision for old age. Similarly, since the Korean War, financial hardships entailed in medical care for the aged are in fact due largely to the transitory inflations of the Second World War and the Korean War which, in effect, confiscated large fractions of the savings of many who are now retired; but the hardships (or alleged hardships) are misdiagnosed as due to per­sistent forces that will continue to affect all retired people.

Instead of myself discussing the neglect of long-run consequences, I should like to quote from the Federal Reserve Bank of Chicago‘s Business Conditions bulletin of June 1961. Under the title, "De­pressed areas—some lessons from the past," the bulletin says:

"In the course of wide debate, economists and public policy makers have often overlooked the fact that depressed areas have been a recurring aspect of the economic development of this country. American history in­cludes many accounts of the rise and fall of communities and whole regions owing to changes in tech­nology, exploitation and exhaustion of natural resources, changes in demand and the migration of in­dustry to other parts of the coun­try in response to the pull of new markets—the same factors cited as contributing to chronic unem­ployment in today’s depressed areas….

"There is, of course, an inherent danger that some attempts at solv­ing the problem may backfire and only prolong the process of read­justment as well as contribute to an inefficient allocation of the na­tion’s resources….

"Thus, the experience of eco­nomic readjustment to the decline of the lumbering industry in the northern counties of the Lake states has emphasized… that there is always the risk that some attempts to solve the problem of depressed areas may not work at all and may only complicate and delay the adjustment process. Wit­ness the collapse of the campaign to promote farming on the cut-over lands despite vigorous back­ing from the state governments, the railroads, lumber companies, local businessmen, and even ‘ex­perts’ from the agricultural col­leges."

I have the impression that good examples could be drawn from European history of the great cost that may be incurred by neglect­ing long-run consequences when adopting policies that seem to pro­vide some hope of temporary relief of symptoms. For the United States, it is probably not a great distortion to say that most of the worst economic problems that we face today have been created by the long-run ill effects of policies adopted in the past to deal with some much smaller problem.

Vested Interests

The other force that I think must be added to Tocqueville’s in explaining the contemporary movement toward larger federal spending, for which the "unmet social needs" argument has pro­vided buttressing, is a rather pro­found change in our political pro­cesses since the days of Tocque­ville. The expansion of the federal government’s welfare activities has led to a great increase in the importance of pressure groups. Many of the programs for expan­sion of the public sector get their effective backing not from those who would receive the service but from those who would sell it to the government. While this is strikingly true in the case of edu­cation, medicine may seem to be a counter-example; but in the case of medicine, the opposition to ex­panded government activity comes from those who are now selling the service and who visualize others selling it or themselves sell­ing it on less advantageous terms if the government expands its ac­tivity.

As a matter of fact, as government welfare programs have fallen more and more under the control of pressure groups, the real prob­lems have tended to be neglected. The consideration of depressed areas relief illustrates this. This is not a depressed areas problem, but many different problems, with varied causes. Some of the most serious of these problems are in the so-called "hillbilly" areas—the mountain regions of certain Southern and border states. These groups for the most part lack suf­ficient voting strength to attract any substantial federal funds. Federal funds flow instead to areas where breakdown of law and order, lack of even justice in the courts and administrative agen­cies, demoralization of the labor force, and exploitation by state and local governments have driven industry away. Federal funds tend to subsidize and perpetuate the causes of the difficulty. In the "hillbilly" areas, on the other hand, there would be some pros­pect for success of efforts to im­prove the level of education and skills, knowledge about opportuni­ties elsewhere, and mobility.

In conclusion, let me remark that it is perhaps a mistake to call the position of the "unmet social needers" socialism, even though their position represents, as I have pointed out earlier, a gradual evolution from the socialist position of a century ago, and is its contem­porary counterpart in the United States. Socialism has traditionally been associated with government ownership of land and capital. The modern movement would continue a large measure of private owner­ship and private enterprise, but seeks to elaborate and to extend control of private activities and to confiscate a large and growing part of the private product. This is car­ried on partly in the name of unmet social needs at home, and partly in the name of national security. It is in many respects on all fours with mercantilism, the economic policy followed by England and other Eu­ropean countries in the seventeenth and eighteenth centuries, which was a major cause of the Ameri­can Revolution. Indeed, the move­ment to enlarge the "public sector" represents perhaps the most pow­erful reactionary force that has arisen since the departure of mer­cantilism from this country with the adoption of the Constitution in 1789.



Ideas on Liberty

Cotton Textiles, 1760-1835

At the accession of George III (1760), the manufacture of cotton supported hardly more than 40,000 persons; but since ma­chines have been invented by means of which one worker can produce as much yarn as 200 or 300 persons could at that time, and one person can print as much material as could 100 persons at that time, 1,500,000 or 37 times as many as formerly can now earn their bread from this work.

And yet there are still many, even scholars and members of Parliament, who are so ignorant or so blinded by prejudice as to raise a pathetic lament over the increase and spread of the manu­facturing system… there are persons who regard it as a great disaster when they hear that 150,000 persons in our spinning works now produce as much yarn as could hardly be spun with the little hand-wheel by 40,000,000.

These people appear to cherish the absurd opinion that if there were no machines, manufacture would really give employment to as many millions as now; nor do they reflect that the whole of Europe would be inadequate for all this work; and that in that case a fifth of the whole population would need to be occupied with cotton-spinning alone! Both experience and reflection teach us just the contrary; and we should certainly maintain that, if we still had to spin with the hand-wheel today, cotton manufac­ture would employ only a fifth of the present number.

EDWARD BAINES, History of the Cotton Manufacture in Great Britain, 1835


January 1963

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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