All Commentary
Monday, April 1, 1963

Economic Growth

Dr. Russell is Director of the School of Poli­tical Economy of the Foundation for Economic Education.

The word “democracy” now has a rival for popularity; it is “eco­nomic growth.” and like democ­racy, economic growth seems to mean whatever the user wants it to mean. Ordinarily, the growth of our economy is measured by the gross national product figures, and thus refers to total national spend­ing (government and private) without regard to what the spend­ing is for. By that popular meas­urement, however, we shall see that a decrease in our material level of living can occur during a period of high economic growth, as is often the case during war­time. Obviously, that type of growth is not what one ordinarily has in mind when he thinks of a prospering economy.

To avoid such confusion, I de­fine economic growth as any in­crease in the production of goods and services that consumers want and will pay for voluntarily. If economic growth (that is, a higher level of living) refers to anything else, the term becomes not only meaningless but actually mislead­ing.

For example, as I have defined it, an increase in the production and sales of canning machinery, hula hoops, and vacation tours represents real economic growth; we consumers want them, are will­ing to pay for them ourselves, and are confident that they increase our level of living in one way or another. Otherwise we wouldn’t buy them. But the current inclu­sion of the cost of bigger armies and more bomb factories in our economic growth figures is surely a distortion of what we all visual­ize when we speak of a growing economy. For clearly, those proj­ects mean that fewer (not more) goods and services are available for our daily consumption. While I am highly in favor of giving up a part of my income to build nu­clear submarines, surely it is mis­leading to add the cost of them to our economic growth figures, as is now done.

Gross National Product

Millions of intelligent and re­sponsible persons are obviously in disagreement with my definition and concept of economic growth. Most economists and practically all officials of the United States, as well as those of the Soviet Union, define economic growth as any increase either in capital goods or in consumer goods and services, government or private—that is, any increase in gross na­tional product. By their measure­ment, it makes no difference at all whether the consumers want the goods and services and are willing to pay for them. Nor, apparently, does it make any difference to them whether our level of living is thereby increased or decreased, so long as the figures themselves are rising.

According to them, any increase in the capacity to make tanks or hydrogen bombs should be in­cluded, along with houses and bread, as economic growth. The building of dams to water deserts to grow food to be stored in sur­plus ships are all included in our economic growth. As now meas­ured, our gross national product (and thus our economic growth) could be increased dramatically if our government printed the money to pay unemployed workers to tear down one-half of all the houses in the United States, and then paid them again to build back the houses. Our gross national prod­uct (and thus our rate of eco­nomic growth as now measured) would be increased by the destruc­tion as well as by the construction. Further, if the government today were to forbid the production of automobiles and require the man­ufacturers to spend the same amount of money on the produc­tion of buggies, our economic growth figures would not neces­sarily thereby decrease. I am of the strong opinion, however, that my level of living would fall sharply if I had to travel by horse and buggy instead of by automo­bile.

Since governmental decisions and activities now play such a prominent part in our economic growth, perhaps a comparison of how the American economy has performed under different degrees of government control would be of interest at this point. You under­stand, of course, that it is impos­sible to find two periods in eco­nomic history that are truly com­parable. Further, measurements such as gross national product are, at best, merely rough and often erroneous estimates of what hap­pened in the economy as a whole in the past. So while these statis­tical devices are of some value to economic historians, the figures must be interpreted with extreme care.

Variable Growth Rates

Economic growth figures for the United States are rather sparse before 1900. Even so, econ­omists consider them adequate for indicating general trends. For example, from the founding of the United States as a nation in 1789, and continuing until 1830, the growth rate per capita, as meas­ured by rough estimates of gross national product in dollars of the same general purchasing power, was poor indeed. In fact, it barely moved forward during that entire 41-year period. But for the next 100 years, from 1830 to 1930, the rate of growth by the same meas­urement was truly phenomenal. While economic historians are far from unanimous in their esti­mates, it seems reasonably certain that the per capita real level of living of the American people at least tripled during that 100-year period, and perhaps quadrupled. And if one chooses to count as growth the longer life expectancy, the shorter work week, and the increased variety and quality ofthe goods and services produced, the Americans of 1929 might well have considered themselves six or eight times better off materially than were their great-grand­parents of 1830.

That fantastic growth record accounts for the oft-heard state­ment that the level of living in the United States tends to double with each generation of 30 years or so. But from 1929 through 1962, our growth rate has been well below the preceding 100-year average. And for the past five years, the rate has been much like that of 1789-1830; that is, it has been just barely moving forward. If one is interested in advocating and supporting policies to help our economy prosper again, he is obli­gated to search for probable rea­sons to explain the differing growth rates during those periods. So let us first briefly examine the early economic history of our na­tion.

Mercantilism in Early America

Most of us are unaware that the United States did not have a free market economy during its early history. Our forefathers generally endorsed and supported the mer­cantile philosophy that existed throughout the Western World from around 1500 to around 1800. True enough, the sad results of that semi controlled economy as practiced by Great Britain was one of the causes of the American Revolution. But the economic causes of the revolt were inspired more by the place assigned to the American colonies in the general scheme than by a repudiation of the philosophy of government in­tervention as such.

Throughout the War for Inde­pendence, and continuing for the first 40 years or so after the colo­nies became a nation, the leaders of the national and state govern­ments of the United States gen­erally continued to follow the old mercantile and semi feudal policies of the government-directed econ­omy. On the national level, there were vast public works projects, irresponsible manipulation of the money supply that resulted in ruinous inflation, and heavy con­trols of various kinds on all for­eign trade. Human slavery was a national policy. In itself, that sad and uneconomic practice neces­sarily meant that the economy was far from free.

On the state level, the politi­cians generally continued their customary controls over wages, hours of work, working conditions, and apprentice regulations. They encouraged certain businesses and professions with tax concessions and subsidies. They discouraged, and sometimes prohibited, other professions and businesses.

The evidence is clear that the economy of the United States did not prosper during its early his­tory of mercantilism. We cannot prove that the various controls caused the stagnant economy; we can only say with certainty that the economy did not move forward under them.

The philosophy of mercantilism (that is, a type of controlled econ­omy) came under increasing at­tack during the last quarter of the eighteenth century. The free market philosophy that was for­malized by Adam Smith in his Wealth of Nations in 1776 found increasing acceptance in both Great Britain and the United States. The free market did not come to Britain until 1846 and the repeal of the so-called Corn Laws. There is no comparable and spe­cific date for the emergence of the free market economy in the United States. But with the exception of the still-feudalistic and slave-own­ing South, it is reasonably safe to say that the economy of this na­tion was generally free from seri­ous government restrictions by 1830.

A Century of Rapid Growth

The most fantastic material growth record the world has ever known then began in the United States and lasted for the next 100 years. Wages were left to find their own levels—and they soon became the highest in the world. The feudalistic guild policies and restrictive apprentice regulations were repudiated. Labor unions as we know them were nonexistent. While the federal government did continue to encourage and sub­sidize various projects it consid­ered to be of national importance (railroads, for example), at least it abandoned its former policy of direct ownership and control. With the exception of the Civil War period, those great increases in production throughout that cen­tury of progress consisted almost entirely of goods and services that consumers wanted and paid for with their own money. Further, the increase here referred to was on a realistic per capita basis that included the millions and tens-of-millions of immigrants who clearly preferred our free market system to the still-feudal­istic continental European system. It was during this period—prob­ably around the end of the nine­teenth century—that the United States became the most powerful nation, with the highest level of living, that the world had ever known.

Some persons claim that our rapid growth and high level of living were due primarily to our vast areas of land. But several other nations with vast areas of land continued to stagnate during the same 100 years.

Others point to our vast min­eral, forest, and water resources. But that hardly explains why other nations with similar natural resources made little if any prog­ress.

Nor are Americans innately more intelligent than the people of other nations. Nor did they work longer hours here than else­where. Nor did they begin with a stock of machines and factories (capital) that was not available on equal terms to others.

After considering all possibili­ties that might account for our rapid growth rate during those 100 years, I am forced to the con­clusion that the primary reason was our essentially free market economy and the “hands off” policy generally followed by our government.

Back Toward Intervention

But just as the philosophy against government controls over the economy began to find increas­ing acceptance around the end of the eighteenth century, just so did the reactionary philosophy for a return to government controls begin to find increasing acceptance in the United States early in the twentieth century. The Re­publican President, Theodore Roosevelt, discovered that political campaigns to restrict “big busi­ness” found ready acceptance among the voters. The Republican President, William Howard Taft, was in favor of the Federal Re­serve Banking System of 1913 with its national control of our money and banking policies. Those two Republican Presidents also fa­vored the Sixteenth Amendment and the new tax system of penal­izing the successful and subsidiz­ing the unsuccessful. Campaign pledges to “conserve our natural resources” proved to be the surest possible way to gain high political office. The American people even turned to the federal government for a constitutional amendment to control our drinking habits and to abolish an entire industry!

State regulation of wages, hours, and general working con­ditions grew apace. The labor union movement gained millions of members and became a power­ful force in the economy. Even so, our economy was still the freest in the world, and it continued to forge ahead for the next 30 years at about the same rate of growth and increasing level of living as those of the preceding 70 years.

Then came the stock market crash in the fall of 1929. It was another of those setbacks that in­variably follow an expansion of credit and “paper investment” that are based on inflation instead of real savings. In previous simi­lar occurrences (1907 and 1921, for example), the policy of our government had still generally been to do nothing during such periods of business failures and increased unemployment. Thus, as usual, those two “money and credit” depressions quickly ran their courses—the unsound in­vestments were liquidated, and the economy surged forward again. But by 1929, a new philosophy concerning the purpose and func­tions of government had been ac­cepted by most of our political leaders and the American people in general.

Prelude to the “New Deal”

A direct result of this new (ac­tually, old and reactionary) philos­ophy was a sharp increase in positive government action to get our economy rolling again. The Republican President, Herbert Hoover, rushed in with his Recon­struction Finance Corporation to help business, and thus to prevent unemployment. He also advanced and supported several agricultural programs to help the hard-pressed farmers. He encouraged the idea of shorter hours of work in order to decrease production and keep prices high. He also encouraged in­dustrial leaders to keep wages above the competitive free market level. He clearly endorsed the concept of creating prosperity and economic growth by deficit financ­ing and make-work projects.

In short, contrary to what is generally believed, Mr. Hoover fully committed the powers of gov­ernment to the positive task of ending the recession and, as he phrased it, to put two chickens in every pot. But under increased government controls and spending, the recession turned into a depres­sion and became worse, year by year. By 1933, our level of living had dropped back to that of 1906, as measured by gross national product on a per capita, constant dollar basis.

Then Mr. Roosevelt took office, with still greater controls over the economy to make it move forward again. He increased sharply both deficit spending and make-work projects. The depres­sion continued. There was a par­tial recovery in 1936-37, followed by another crash in 1938. More than ten million persons were still looking for jobs. In fact, mass un­employment—and a sharply re­duced level of living for the Amer­ican people—continued in an ex­treme form until we went to war in 1941.

These facts and comparisons cannot correctly be used to prove that the longest and most severe depression in our history was posi­tively caused by government in­tervention in the market place, even though one may logically sus­pect that such is the case. But these figures do prove one thing beyond any shadow of a doubt: While there may or may not have been other reasons for the con­tinuation of the depression, our level of living positively declined during that 12-year period of in­creasing controls and deficit spending by government to get our economy rolling forward again.

World War and After

It was not until 1942 and our all-out war effort that the actual gross national product reached a level that was in harmony with the long-time growth rate of 1830­1930. At that point, and for the next three years, the growth rate as measured by gross national product leaped forward to new levels. Much of the growth was real; that is, more products per capita were produced for con­sumption. But the products that caused most of the increase—tanks and battleships—contributed nothing to our level of living. If, as I recommend, the growth rate were measured only in real terms of voluntarily-bought houses, cars, clothing, and similar products, our per capita level of living was still low in 1945—in fact, lower than the 1929 level per capita, even though the nation’s total pro­duction that now counts as eco­nomic growth had increased markedly.

Now let us see what happened to the growth rate and level of living under continuing govern­ment controls and deficit financing from the end of World War II through 1962. During about half of that period, we made consider­able progress. But throughout that 18-year period, our rate of growth has been well below the 1830-1930 average. Only during the Korean War was there any marked in­crease in it, as measured by gross national product. But once again, that temporary spurt was due pri­marily to the production of guns and bombs, which hardly add to one’s level of living. For the past five years, the actual annual growth rate for the increasingly controlled American economy has been well below one per cent per capita—less than one-half what it was in the comparatively free economy that generally prevailed for the 100 years before 1930 and the initiation of positive govern­ment action to move our economy forward. Further, that disturbing decrease in our long-time rate of growth has included a heavy and still increasing amount of govern­ment services that few people really want or are willing to pay for.

Disposable Personal Income

So even when we use the social­istic measurement for economic growth—that is, all production, government or private, wanted or not wanted—our economy has not performed at all well under gov­ernment direction. A more realis­tic measurement of economic growth—one that is reasonably close to the measurement I recom­mend—is the money you and I have left after taxes to spend for goods and services we want. So here is the comparison for dispos­able personal income in constant dollars per capita for two periods of the same length—1897 to 1930, and 1930 through 1962.

That figure doubled itself be­tween 1897 and 1930 in our essen­tially free economy. Even with the tremendous immigration that oc­curred during that 33-year period, real per capita take-home pay in­creased by at least 100 per cent. But since 1929—during the fol­lowing 33-year period—disposable personal income has increased by only around 65 per cent.

Our government is now engaged in an extensive program to in­crease our faltering rate of eco­nomic growth and level of living. The actions already taken, and those proposed for the coming years, are markedly similar to the measures followed by the govern­ment from 1930 through 1945—that is, deficit spending, inflation, and make-work projects, plus a huge increase in armament pro­duction. Most definitely, those measures were a failure then, as measured by the production of consumer goods and services to in­crease our level of living. I can find no logical reason to suppose these schemes will be any more successful now.

Statistically, however, the gov­ernment has the power to increase our rate of growth considerably—if we count every product or service that the government buys or produces (wanted or not wanted), as is now the case. By the customary and popular means of deficit financing and inflation, our government can indulge in all sorts of grandiose “economic growth” projects—urban rede­velopment to tear down large sec­tions of our cities and build them back again, draining swamps and irrigating deserts in order to in­crease the amount of arable land we can pay people to keep out of production, trips to the moon, in­creased production of all the items that are used to fulfill our for­eign aid commitments, more price supports and subsidies that con­sumers won’t willingly pay, and so on through 10,000 and more simi­lar projects. All of these will prob­ably increase our gross national product, and thus will also in­crease our economic growth rate as now measured.

“New Frontier” Psychology

Personally, I fail to see how any of these projects can truly in­crease our level of living by pro­ducing more goods and services that consumers want and are will­ing to pay for. But, worse still, and in spite of the sad record of government interventions in the economy in the past, most of us now look to the federal govern­ment as the mainspring of our economic well-being. If you doubt this, ask the next five persons you meet what they think would hap­pen to our economy if the “cold war” suddenly ended and our mili­tary machine were dismantled within the next year, even with a corresponding decrease in taxes. Ask any economist what he thinks would happen to our gross national product and employment levels if the government immediately re­duced its nonmilitary spending by one-half, even with a correspond­ing across-the-board tax cut. Ask those who are protected against both foreign and domestic compe­tition, and those who receive sub­sidies, what they think would hap­pen to total production in our na­tion if their subsidies and protec­tion and government guarantees were removed. Put those same questions to the top management of the privately-owned corpora­tions all across the nation. Nearly all the answers will be the same. That is, whether or not it is true, they honestly believe that if our government discontinued any or all of those things, our economy would be in serious trouble.

Now stop and think! Our econ­omy is in serious trouble, and it has been in trouble most of the time since the government began directing and controlling it so ex­tensively in 1930.

More than one-third of our na­tional income is now taxed away and spent by government on all levels, and we have serious eco­nomic difficulties. Suppose the gov­ernment taxed and spent one-half of our incomes; would that solve any problem now before us? Surely the answer is no.

Suppose the government were in total control of our economy, in­stead of merely in partial control; do you imagine that we consum­ers would thereby get more goods and services we want? Again, surely the answer is no.

When you get right down to it, though, those are the only two positive actions that our govern­ment can take to “get our economy moving.” That is, our officials can tax more and spend more—di­rectly, or indirectly by means of planned inflation. And they can impose more controls. Those are the only positive “economic growth” weapons in the govern­ment’s arsenal. Yet, beyond any shadow of a doubt, our rate of economic growth has been com­paratively low under increased government spending and controls in the past. But in spite of that record, millions of sincere and good Americans are imploring our government to take positive action to get us moving again—with more spending and more controls!

But What Do They Cost?

Now it is logical to assume, of course, that the increase in some economic services that have been traditionally provided by govern­ment actually does represent real economic growth in much the same sense as similar private serv­ices. For example, education is a service that all parents want for their children. And presumably, we are willing to pay for it—in whatever form the bill is pre­sented to us. This applies also to highway construction, fire depart­ments, and to perhaps one or two other products or services for which the government has as­sumed almost total responsibility. But even when government does provide consumers with services they want and are willing to pay for—services that actually do in­crease our material level of living—there is no positive way to measure their economic values. And even at best, I am confident that we are paying more for them than would be the case in a market economy.

Now I am well aware of the claims advanced by the disciples of John Maynard Keynes concern­ing the secondary (or multiplier) effects of government spending, even when the spending is for the production of goods that cannot be used in our daily living. That is, the persons who are paid by government to produce the goods for our military and foreign aid programs will, in turn, use the money to buy consumer goods and services. That new or increased consumer purchasing power will thus contribute to real economic growth in the sense I have defined it.

That appears to be the reasoning behind the present Administra­tion’s planned deficit of $12 billion or so for next year. But if we are to avoid continuing inflation, the government must first tax the money away from the people. If that fiscal policy is followed, the tax payments will necessarily de­crease the taxpayers’ ability to purchase consumer goods and services themselves, or to invest in the growth of our factories and machines. Thus any new jobs and production created by government spending from taxes will merely replace the jobs and production destroyed by the taxes themselves.

An Illusion of Progress

If the spending is by deficit fi­nancing and inflation instead of taxation, it is true that the result is often a pseudo prosperity, for a short period of time. Then, since the increased industrial activity is based primarily on government spending and inflation, the stimu­lating effect is brought to a halt as soon as prices catch up with the increased money supply. Many formerly profitable investments then become unprofitable. Thus, in order to keep the illusion going, the economic pump must be primed again and again—as has clearly been the case in the United States since 1929. Sooner or later, that bankrupt policy must col­lapse here, as it has in scores of other nations that have adopted it. The inevitable result is then revolution or dictatorship—or both. That probable result of a policy of continuous inflation should be given serious thought by all Americans who are, actively or passively, now deciding the type of economy we will have for our­selves and our children for the next 50 years.

To help us decide, this final fact from economic history should also be considered: I cannot find even one historic example to show that a controlled economy has ever resulted in a higher level of living than a comparable free economy over a significant period of time. I can, however, find many examples to the contrary. The most dramatic one currently is, of course, the comparison of East and West Germany. Comparisons of current versus past economic policies in Japan, Italy, and vari­ous other nations also give the same answer.

I am convinced that we Ameri­can people are not now following a realistic path toward economic growth when we turn to govern­ment “to get us moving again.” We forget that the only positive ways the government can use to attempt this are to tax, inflate, spend, and control—that is, to leave you with less real money to spend, and to restrict the ways you can spend what you have left. Thus we are clearly not choosing the means and policies that will increase the long-time production of goods and services that we con­sumers want and are willing to pay for. I am convinced that the only possible way to accomplish that goal is to reject totally the restrictive influence of govern­ment controls and ownership and deficit spending, and to return to the free market economy that is the hallmark of a responsible and prosperous people.




Ideas on Liberty

The Greater Contribution

The proper purpose of the economist-tractarian is not that of selling whole schemes of immediate action but that of influencing, if he may, the course of democratic discussion and thus perhaps affecting the course or long-term direc­tion of action rather than the detailed, immediate steps.


Federal Tax Reform