All Commentary
Monday, February 1, 1965

The Individuals and the State


This article is extracted by permission from the pamphlet, “The Private Sector and the Public Sector,” published May, 1964, by the Intercollegiate Society of Individualists, Inc. At the time of the writing Dr. Peterson was professor of economics at New York University.

The idea that the public sector of our economy is being “starved” while the private sector is becom­ing more “affluent” is gaining popularity in the United States. Perhaps the most famous disciple of this idea is Professor John Ken­neth Galbraith. In his book, The Affluent Society,’ he stated:

“The community is affluent in privately produced goods. It is poor in public services. The ob­vious solution is to tax the former and provide the latter—by mak­ing private goods more expensive, public goods are made more abundant.”

Yet in 1927 the tax and other governmental revenue take of the net national product by local, state, and Federal authorities came to but 13.8 per cent, and in 1961 the take had risen to 34.4 per cent, and today it is higher still.

The following table measures the growth of the public sector in terms of the tax and other govern­mental revenue take by Federal, state, and local authorities as a per cent of net national product.

But even the bare statistics of the heavy increase in the financial magnitude of the public sector, sometimes called the “starved” public sector, do not imply enough about the growing role of the state in our lives. For the public sector intervenes in a million and one otherwise private decisions.

Consider, for example, the per­vasiveness of the Federal income tax—or should I say loophole—mentality in our day-to-day lives. Thus, coupled to the common mod­ern dilemmas of how many cal­ories, and where do I park, nowa­days Americans also have to con­front the problem: Is it deduct­ible?

Many Forms of Control

Still, taxation is but one part of state intervention. For under state power, rents will be controlled, cof­fee burned, cotton propped, for­eign competition subsidized, the underdeveloped world aided in perpetuity, wages raised by fiat, tariffs erected, trade made “fair,” currency inflated, farmers paid not to farm, prices fixed, and mergers forbidden.

Little wonder then that in his Revolt of the Masses, the Spanish philosopher Ortega y Gasset wrote:² “This is the greatest change that today threatens civili­zation: State intervention—the absorption of all spontaneous social action by the State… Society will have to live for the State, man for the governmental machine. And as, after all, it is only a machine whose existence and maintenance depend on the vital supports around it, the State, after sucking out the very marrow of society, will be left bloodless, a skeleton, dead with that rusty death of ma­chinery, more gruesome than the death of a living organism.”

Of course, some public officials argue the larger the public sector the better. In a Presidential talk we were asked to consider how public expenditures “help deter­mine the level of activity in the entire American economy.” Ac­cording to this line of reasoning, the more the government spends, the more activity it creates in the economy, the richer we all become. One rub to this line of reasoning, however, is that government has no spending money other than that which it taxes or borrows from its people. To be sure, the Keynesian economist may point to the pos­sibility of deficit financing—of spending without equivalent taxa­tion. This deficit finance, though, when based on a permanently ex­panding bank-financed public debt, can only be maintained through the printing press—through in­flation—through this hidden and highly regressive tax upon the people. Hence, either one way or the other, the people are taxed; government has no source, has no resources, other than those it ap­propriates from the people.

This is the irony of those ad­vocates of a larger public sector; they would pile greater debt on our already debt-ridden economy. In 1958, for the first time in his­tory, Congress raised the debt limit twice in one year. In 1963 Congress was forced to raise the limit again—and again. The situ­ation reminds one of the drunk who asks for but one more for the road and then argues that there are still quite a few more roads to travel. Meanwhile, the Federal government distributes its welfare largesse with a free hand, in effect buying votes with the taxpayer’s own money. How much money can be gauged from the fact that the Federal, state, and local govern­ments cost the American people $158.7 billion in 1961, or some $900 for each American. This fig­ure does not include indirect costs for bookkeeping, report-filing, le­gal fees, and accounting and vari­ous clerical expenses. Direct bene­ficiaries of this spending include some 40 million individuals regu­larly receiving monthly govern­ment checks. This huge bloc and their families are not likely to ap­prove candidates, proposals, or philosophies calling for diminu­tion of the public sector. But this bloc is not alone in securing gov­ernment favors. Other blocs in­clude beneficiaries of tariffs, de­fense contracts, favorable tax rul­ings, regulatory privileges, price supports, and the like.

Or as political analyst Samuel Lubell wrote in his The Future of American Politics:³

“The expansion of government to its present scale has political­ized virtually all economic life. The wages being paid most work­ers today are political wages, re­flecting political pressures rather than anything that might be con­sidered the normal working of supply and demand. The prices farmers receive are political prices. The profits business is earning are political profits. The savings people hold have become political savings, since their real value is subject to abrupt depre­ciation by political decisions.”

To sum up, the public sector is a necessary sector. But so too is the private sector. Each depends on the other, but as one expands at a faster rate of growth, the other necessarily shrinks in pro­portion. The American dilemma seems to be that the public sector is expanding rapidly without dis­cipline, without plan, without the constraint necessary to preserve the private sector—the sector of individual liberty.

Foot Notes

1 Houghton, Mifflin, 1958, p. 315.

2 Norton, 1932, pp. 120-121.

3 Doubleday Anchor, 1956, p. 274.


  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.