Economists and Public Policy

There are some economists who argue that economics is a positive science and that all we can do is to explain the consequences that follow from various economic policies. We cannot say whether one policy is preferable to another, because to do so would require us to introduce value judgments, in the making of which we have no special competence. Thus we can say that certain agricultural policies (say collectivisation) will lead to widespread starvation but we cannot say whether collectivisation is or is not desirable. Such self-restraint is, I think, unnecessary. We share (at least in the West) a very similar set of values and there is little reason to suppose that the value judgments of economists are particularly eccentric. There will, of course, be instances in which, knowing the consequences of a change in policy, there will be differences in opinion as to whether the change is desirable. But such cases are, I believe, exceptions and can be treated as such. I agree with Milton Friedman's judgment that "currently in the Western World, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action—differences that in principle can be eliminated by the progress of positive economics—rather than from fundamental differences in basic values, differences about which men can ultimately only fight." Of course, if this is so, it has the result that an analysis of the consequences of alternative social arrangements becomes a prescription for policy (since we all share the same values). Thus it hardly matters, once it is established that a certain policy will lead to widespread starvation, whether we add that the policy would be undesirable—although to refrain from doing so on principle seems like an affectation. In general, one would expect that a statement of the consequences of alternative policies would bring its policy recommendations with it.

Whether they should or not, few economists do in fact refrain from making pronouncements on public policy—although the state of the economy (both here and elsewhere) suggests either that the advice is bad or if good, that it is ignored. Of course, there is the other possibility, more disturbing from some points of view but reassuring from others, that the advice is disregarded, whether it is good or bad, I happen to think that we are appallingly ignorant about many aspects of the working of the economic system, at least so far as that part of economics is concerned in which I am particularly interested—the economics of the firm and industry. I think we know very little about the forces which determine the organization of industry or the arrangements which firms make in their transactions with one another. We have, of course, been told that when we consider the economics of the system as a whole, what is termed macroeconomic policy, that things are very different, at least since the appearance of Keynes' General Theory, and that we now know how to secure full employment coupled with a stable price level. I leave to others more knowledgeable in this field whether our present troubles are due to ignorance, impotence in affecting policy or some other cause. But I do seem to have detected in recent years a degree of humility among workers in this field not hitherto observed.

SIMPLE TRUTHS

Yet having said this, I would not wish to argue that economists do not have something valuable to contribute to the discussion of public policy issues. The problem is that economists seem willing to give advice on questions about which we know very little and on which our judgments are likely to be fallible while what we have to say which is important and true is quite simple—so simple indeed that little or no economics is required to understand it. What is discouraging is that it is these simple truths which are so commonly ignored in the discussion of economic policy.

It requires no great economics to know that at a lower price, consumers will buy a greater quantity. Or to know that as price falls, producers will be willing to supply less. Even the combining of these two notions to show that, if the price is put low enough, producers will not be willing to supply as much as consumers wish to buy (so that what is called a "shortage" will result) is easy enough to understand. Indeed, the essentials of such a situation would be understood by many who have not studied economics at all. Yet consider an example. In the early 1960's, the Federal Power Commission began to regulate the field price of natural gas. The price was frozen at the 1959-1960 level. It became apparent that this was lower than the price would have been without regulation. What followed was what one would expect. Consumption was encouraged; the discovery and exploitation of natural gas was discouraged. The effect of the regulation was at first masked by a short-term fall in the cost of coal and by a reduction in the quality of what was supplied (the consumer had less assurance of the availability of the gas in future). But as time went on, the nature of the regulation-induced shortage of natural gas became obvious to the meanest intelligence and the Federal Power Commission began to take steps to raise the price.

A number of studies have been made (by Professor Paul MacAvoy and others) and there is general agreement about what happened. One of these studies was carried out by Professor Edmund Kitch at the University of Chicago Law School and was published in the Journal of Law and Economics in 1968. Later Professor Kitch updated his study and then presented his findings in Washington, D.C. in 1971, in a talk entitled "The Shortage of Natural Gas." A large part of the audience consisted of Washington journalists, members of the staffs of Congressional Committees concerned with energy problems, and others with similar jobs. They displayed little interest in the findings but a great deal in discovering who had financed the study. Many seem to have been convinced that Professor Kitch had been "bought" by the industry. A large part of the audience seemed to live in a simple world in which anyone who thought prices should rise was pro-industry and anyone who wanted prices to be reduced was pro-consumer. I could have explained that the essentials of Professor Kitch's argument had been put forward earlier by Adam Smith—but most of the audience would have assumed that he was someone else in the pay of the American Gas Association.

Adam Smith does not, of course, mention the natural gas industry, which did not exist in his time, but he deals with the same problem in his discussion of the Corn Trade. By corn, Adam Smith means, of course, wheat. I quote Adam Smith: "The interest of the inland (corn) dealer, and that of the great body of the people, how opposite soever they may at first sight appear, are, even in years of the greatest scarcity, exactly the same. It is his interest to raise the price of his corn as high as the real scarcity of the season requires, and it can never be his interest to raise it higher. By raising the price he discourages the consumption, and puts everybody more or less, but particularly the inferior ranks of people, upon thrift and good management…If by not raising the price high enough he discourages the consumption so little, that the supply of the season is likely to fall short of the consumption of the season, he not only loses a part of the profit which he might otherwise have made, but he exposes the people to suffer before the end of the season, instead of the hardships of a dearth, the dreadful horrors of a famine."

But, as Smith points out, since the dealer will maximize his profits by adjusting the price at which he sells so that consumption over the season is equal to the supply he is not likely to do this. Adam Smith adds: "Whoever examines, with attention, the history of the dearths and famines which have afflicted any part of Europe, during either the course of the present or that of the two preceding centuries, of several of which we have pretty exact accounts, will find, I believe, that a dearth never has arisen from any combination among the inland dealers in corn, nor from any other cause but a real scarcity, occasioned sometimes, perhaps, and in some particular place, by the waste of war, but in by far the greatest number of cases, by the fault of the seasons; and that a famine has never arisen from any other cause but the violence of government attempting, by improper means, to remedy the inconveniences of a dearth…When the government, in order to remedy the inconveniences of a dearth, orders all the dealers to sell their corn at what it supposes a reasonable price, it either hinders them from bringing it to market, which may sometimes produce a famine even in the beginning of the season; or if they bring it thither, it enables the people, and thereby encourages them to consume it so fast, as must necessarily produce a famine before the end of the season. The unlimited, unrestrained freedom of the corn trade, as it is the only effectual preventative of the miseries of a famine, so it is the best palliative of the inconveniences of a dearth; for the inconveniences of a real scarcity cannot be remedied; they can only be palliated." Of course, the beneficial role of the merchant in palliating the inconvenience of the scarcity is not understood. "In years of scarcity the inferior ranks of people impute their distress to the avarice of the corn merchant, who becomes the object of their hatred and indignation." And he points out that this hostility to the merchant shows itself in the laws against "engrossing and forestalling," that is, the buying and holding of an inventory to sell at a higher price. Of course, Adam Smith is able to show that the merchant will only find this holding of stocks profitable when it is desirable that he should do so. And he comments: "The popular fear of engrossing and forestalling may be compared to the popular terrors and suspicions of witchcraft." Adam Smith here attempts to discredit the idea that businessmen by holding stocks make prices higher than they would otherwise be by likening it to a belief in witchcraft. Such an analogy would be less effective today—we also believe in witchcraft.

DEVIL THEORY

In the 200 years which have passed since Adam Smith wrote, many economists have argued along much the same lines about the futility of a policy of holding prices below the competitive level. One of these was Edwin Cannan, of the London School of Economics, who wrote about 60 years ago. He was, of course, speaking of the price controls established in Britain at the beginning of the first World War. He describes the public response to a rise in price: "Buyers who have to pay higher prices suddenly become either 'the poor' forced to reduce their consumption of necessary articles or else employers of a particularly needy and deserving class which will be thrown out of work by the rise. All the injured persons are at once represented as being iniquitously robbed by an unscrupulous gang of speculators, middlemen, blood-sucking capitalists, or rack-renting landlords against whom all the resources of the State ought to be brought forthwith. The ideal somewhat vaguely held seems to be an immediate return to the prices of a few months or a year ago." Of course, Cannan argues against price controls in the usual way. But he points to a rather paradoxical aspect of the situation: "When the price of a thing goes up, [people] abuse, not the buyers nor the persons who might produce it and do not do so, but the persons who are producing and selling it, and thereby keeping down its price." So, if there is a "shortage" of wheat or beef, or oil, we abuse those who are producing all the wheat, beef or oil that we have and without whose efforts the "shortage" would have been still greater. The reason why people show this hostility is that, as Cannan points out, if there is an unusual rise in prices, people "are perfectly convinced that the rise with which they have to contend for the moment is unnatural, artificial, and wholly unjustifiable, being merely the wicked work of people who want to enrich themselves, and who are given the power to do so not by the economic conditions…but apparently by some absolutely direct and inexplicable interference of the Devil. This has been so since the dawn of history…but no amount of historical retrospect seems to be of much use. The same absurdity crops up generation after generation."

The character of the public discussion of the oil problem suggests that we are no better than those who went before us. We observe the same attitudes today that Cannan described—"the rise [of price] with which we have to contend at the moment" being "unnatural, artificial, and wholly unjustifiable…the wicked work of people who want to enrich themselves." This raises the question of what the role of an economist should be in a world which rejects the only solidly-based advice that he has to give.

Frank Knight, in his presidential address to the American Economic Association in 1950, posed this question—and gave an appropriately depressing answer. "I have been increasingly moved to wonder whether my job is a job or a racket, whether economists, and particularly economic theorists, may not be in a position that Cicero, citing Cato, ascribed to the augurs of Rome—that they should cover their faces or burst into laughter when they met on the street.…The free-traders, as has been said, win the debates but the protectionists win the elections; and it makes little difference in our policy which party wins, the avowed protectionists or the professed free-traders. Inflation is of course to be brought on as a more pleasant alternative to taxation, and then suppressed by law and police action.…The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.…Can there be any use in explaining, if it is needful to explain, that fixing a price below the free-market level will create a shortage and one above it a surplus? But the public oh's and ah's and yips and yaps at the shortage of residential housing and surpluses of eggs and potatoes as if these things presented problems—any more than getting one's footgear soiled by deliberately walking in the mud." Knight said that, in consequence of this, his interest had tended to shift away from economic theory "to the question of why people so generally, and the learned elite in particular, as they express themselves in various ways choose nonsense instead of sense"—which is one possible response to the situation, although not, I think, the only one open to us. Knight also says something else which is, I think, helpful to those who are looking for an alternative response: "Explanation of policy might conceivably get farther if we…ask why men believe and practice nonsense but in general act so much less irrationally than they argue—and what follows from that."

SAVING GRACE

If we took seriously the arguments used by those who advocate price controls and similar measures, we would expect much more extreme, and less sensible, proposals than are actually put forward. Thus, some Senators believe that lower prices for gasoline would benefit consumers—so they introduce a measure in Congress which would make the gasoline prices of last December mandatory, not the still lower prices that prevailed in the 1930's. The Federal Power Commission undertook in 1961 to regulate the field price of natural gas—so the level of prices which it determined should be charged in future was that prevailing in 1959-1960. As Cannan said, writing some 60 years ago and about a different country: "The ideal somewhat vaguely held seems to be a return to the prices of a few months or a year ago." Similarly, politicians may make speeches which favor the elimination of all pollution; their proposals are much more moderate. Furthermore, I seem to observe that as the harm inflicted by the policy increases, the strength of the support for that policy decreases—which leads, if not to the elimination of the policy, at any rate to a moderation of it. The Federal Power Commission finally did act to raise the field price of natural gas, although it no doubt acted more slowly and made a smaller change than most economists would have liked. With a rise in the price of oil, concern about the fate of the caribou in Alaska became less pressing, and the Alaska Pipe Line is now likely to be built. Although controls, such as price and wage controls, are introduced to prevent the basic economic forces from working, a study of the history of controls would show, I believe, that, over a longer period, there have been very few controls which have not been modified to take them into account, or even abandoned, so that market forces have free sway. My conclusion is that, although a policy may be misguided, we should not assume that its range, severity and duration are not kept in check by recognition of the extent of the harm it produces. I do not myself understand why the political system operates in the way it does. Whether the interests opposed to the policy tend to become relatively stronger in the political arena as the amount of the harm inflicted by the policy increases or whether recognition of the amount of harm plays a more direct role in the political process or both of these factors operate, I do not know, although it would be my judgment that both of these factors exert some weight. At any rate, it may be that there is room for economists' views on public policy to play a valuable part in this process of modification and change, even though they will usually not be able to exercise a decisive influence over the choice of the policy itself. Certainly, however ill-advised policies may be, they are not in their administration devoid of sense. The demand for nonsense seems to be subject to the universal law of demand: we demand less of it when the price is higher.

HOPE

A more optimistic view of the role of the economist in the formulation of public policy or, at any rate, of his future role, was presented by Professor George Stigler in his presidential address to the American Economic Association in 1964, entitled "The Economist and the State." Professor Stigler argued that economists in the past have been willing to express views on the role of the State in economic affairs without making any serious study of how the State did in fact carry out the tasks entrusted to it or making any systematic investigation of the comparative performance of State and private enterprise. This was true both for those, like Smith and Marshall, who wanted to limit Government intervention in the economic system and for those, like Jevons, Pigou and a host of others, who were in favour of an expanding governmental role. Stigler's comments on their work seem a little harsh—they faced difficulties which we do not encounter and their contributions are not without value—but I do not wish particularly to quarrel with his main conclusion. I have argued that our knowledge is very limited—and we are able to read what our predecessors wrote.

Professor Stigler ascribes the lack of influence of economists on the formulation of public policy—which he asserts and I would not wish to deny—to their ignorance. "Lacking real expertise, and lacking also evangelical ardor, the economist has had little influence upon the evolution of economic policy." But that is the past. The future, according to Professor Stigler, will be very different. "The age of quantification is now full upon us. We are armed with a bulging arsenal of techniques of quantitative analysis, and of a power—as compared to untrained common sense—comparable to the displacement of archers by cannon. "…The desire to measure economic phenomena is now the ascendant.…It is a scientific revolution of the very first magnitude.…I am convinced that economics is finally at the threshold of its golden age—nay, we already have one foot through the door. The revolution in our thinking has begun to reach public policy, and soon it will make irresistible demands upon us. It will become inconceivable that the margin requirements on securities markets will be altered once a year without knowing whether they have even a modest effect. It will become impossible for an import-quota system to evade the calculus of gains and costs. It will become an occasion for humorous nostalgia when arguments for private and public performance of a given economic activity are conducted by reference to the phrase, external economies, or by recourse to a theorem on perfect competition.…I assert, not that we should make the studies I wish for, but that no-one can delay their coming.…That we are good theorists is not open to dispute.…The last half century of economics certifies the immense increase in the power, the care, and the courage of our quantitative researches. Our expanding theoretical and empirical studies will inevitably and irresistibly enter into the subject of public policy, and we shall develop a body of knowledge essential to intelligent policy formulation. And then, quite frankly, I hope that we become the ornaments of democratic society whose opinions on economic policy shall prevail."

I was present when Professor Stigler delivered his address and as he ended with these words, it was hard to restrain a cheer. When the immediate impact of this eloquent and moving address had passed, Stigler's assertions brought to mind Pope's couplet: "Hope springs eternal in the human breast; Man never is, but always to be, blest."

MODEST EFFECTS

But even though we do not believe that such a glittering prospect lies ahead of us, we need not despair. If, as I am inclined to believe, economists cannot usually affect the main course of economic policy, their views may make themselves felt in small ways. An economist who, by his efforts, is able to postpone by a week a government program which wastes $100 million a year (what I would consider a modest success), has by his action earned his salary for the whole of his life. Indeed, if we compute the total annual salaries of all economists engaged in research on public policy issues (or questions related to this), which might amount to $20 million (or some similar figure), it is clear that this expenditure (or one much larger) would be justified if it led to a minuscule increase in the gross national product. It is not necessary to change the world to justify our salaries. But does the advice of economists on public policy issues improve the situation in those cases in which it does have some influence? I take Professor Stigler's main purpose to be, not to raise our morale, but to induce us to change our ways so that our advice will be worth following. If, as a result, we achieve my modest aim, we will at least earn our keep. If Professor Stigler's view of the future is correct, we will confer a great benefit on mankind—and be grossly underpaid.

The advice that we have had to offer in the past that was valuable—what I have called the simple truths—was, of course, the implications of a theoretical system which, while its range was restricted, has been confirmed time after time. The assumption of the theory was that businessmen wanted to make as much money as possible and that consumers wanted to get as much for their dollar as they could. Or, put more generally, and with more applications, it is assumed that people tend, in the main, to pursue their own self-interests. It has proved a very robust theory. But, of course, without knowledge of magnitudes (though they could sometimes be inferred) there were a lot of questions that the theory could not answer. But this hardly explains why the theory has been ignored for those questions for which it could give answers.

Professor Stigler pins his high hopes for the future on the growth in quantitative work. But this development is not without its costs. It absorbs resources which might otherwise be devoted to the development of our theory and to empirical studies of the economic system of a nonquantitative character. Aspects of the economic system which are difficult to measure tend to be neglected. It diverts attention from the economic system itself to the technical problems of measurement. I do not mean to suggest that we should avoid quantitative work. But it is well to remember that there is no such thing as a free statistic.

I would like to illustrate my view that nonquantitative work, or at least work with only the crudest form of quantification, can be of value by means of an example. Round about 1960 Senator Kefauver was holding hearings into the drug industry and particularly into its practices in introducing new drugs. The main thrust of the hearings was to suggest that the prices paid were too high but even more that the drugs were often of little or even of dubious value. Senator Kefauver concluded that it would be desirable to regulate the introduction of new drugs. At the time this proposal was under consideration the tragic side effects of the use of thalidomide by pregnant women became known. The result was to generate so much support for drug regulation that the Kefauver proposal, which might otherwise have failed to secure Congressional approval, was enacted into law in 1962. Was it wise to do this? Consider what one economist said early in 1965 and long before the effects of this new law could be known. "I ask myself a question: Suppose I am a physician in the public health service, and somebody presents to me a new drug. I can approve it now, although we do not know its full effects, and commonly we shall not know the full effects of a new drug for five or ten years after it comes out. If I approve it, and a series of tragedies such as this thalidomide tragedy comes, what will happen to me? I shall certainly be discharged, and I will be held up to public obloquy. The public at large will demand that heads roll. The penalties on me are very heavy indeed if I approve a drug I should not have. Suppose on the other hand, that it proves to be a fine drug, and in the long run its achievements are wonderful, but we do not know this yet. If I hold up the use of the drug for five years until all the results are in, a large number of people may die because it was not available. Their survivors will not write and complain that I did not approve the drug earlier. All the penalties are on me in making the mistake of approving the drug too early and none on the mistake of approving it too late. This combination of rewards and penalties…seems undesirable." This simple application of the view that people (including government regulators) tend to have regard to their own self-interest leads to the conclusion that the regulation will result in considerable delay in the introduction of new drugs. Those of us who have seen the great improvements in health which have taken place in recent years as a result of the use of newly discovered drugs, particularly in the period since World War II, cannot but feel that the new regulation may have done more harm than good. In this case, it so happens that by now there has been a quantitative study of the effects of the new drug regulation, by Professor Sam Peltzman of UCLA, and it indicates that apprehension about this legislation was completely justified. The number of new drugs introduced each year on the average in the period 1963 to 1970 was about 40 percent of what it had been in the period 1951 to 1962 and a statistical investigation carried out by Professor Peltzman indicates that the whole of this decline was probably due to the new legislation. But he went further. Noting that while some of the drugs excluded from the market by the legislation would have been beneficial, others would no doubt have proved to be unsafe or no better than drugs already existing, Professor Peltzman proceeded to make a calculation of the probable benefits and costs of the new drug regulation. The result: The gains (if any) which accrued from the exclusion of ineffective or harmful drugs were far outweighed by the benefits foregone because effective drugs were not marketed. This conclusion was clearly foreshadowed by the essentially nonquantitative assessment of the probable results of the new drug regulation to which I drew your attention earlier. The economist who made this assessment was Professor Stigler. It represents a fine example of nonquantitative reasoning.

CHOOSING ALTERNATIVES

The results obtained by Professor Peltzman were not altogether surprising since our normal theory would suggest that there would be a decrease (probably large) in the number of new drugs marketed, and, given the benefits which seem to be derived from newly discovered drugs, one would expect that this factor would dominate the results. But what was surprising (and our theory gives us no basis for expecting it) was that there is no strong evidence that the proportion of inefficacious drugs is substantially less in the smaller number of drugs marketed now than it was in the years before 1962. All this suggests, not that the decisions of doctors and patients about the use of drugs are correct but that it is not easy to devise alternative institutions that will perform better.

This is, I believe, a common situation although economists generally appear to have assumed otherwise. The reason for this sanguine attitude is that, while most economists do not ignore the inefficiencies of a market system, which, indeed, they are often prone to exaggerate, they tend to overlook the inefficiencies inherent in a governmental organization. It is therefore hardly surprising that economists in the last 100 years or so have been led to support (or acquiesce in) an ever expanding role for government in economic affairs and have not felt a need for any serious investigation of the working of governmental organizations. What is wanted, if policy recommendations are to have a solid foundation, is to take into account both how a market actually operates and how a government organization does in fact carry out the tasks entrusted to it.

CRITICAL LOOK

Fortunately the situation I have described does seem to me in process of change. Economists (along with others) are beginning to take a more critical look at the activities of government and the kind of study which I have suggested as desirable is now being made. Certainly there has been more serious studies made of government regulation of industry in the last 15 years or so, particularly in the United States, than in the whole preceding period. These studies have been both quantitative and nonquantitative. I have referred to studies of the regulation of natural gas and drugs. But there have also been studies of the regulation of many diverse activities such as agriculture, aviation, banking, broadcasting, electricity supply, milk distribution, railroads and trucking, taxicabs, whiskey labelling and zoning—I mention only studies with which I am familiar. There are doubtless many others. The main lesson to be drawn from these studies is clear: they all tend to suggest that the regulation is either ineffective or, when it has a noticeable impact, that, on balance the effect is bad, so that consumers obtain a worse product or a higher priced product or both, as a result of the regulation. Indeed, this result is found so uniformly as to create a puzzle: one would expect to find, in all these studies, at least some government programs that do more good than harm.

In my paper on Social Cost, I argued that in choosing between social institutions, the decision should be based on how they would work in practice. I explained that there were costs involved in making market transactions and that consequently there were reallocation of factors of production which would, of themselves, raise the value of production but which would not take place when the costs of the necessary transactions exceeded the gain in the value of production that would result. Such reallocations of factors can also, of course, be brought about by government regulation. Now government regulation also has costs—and government regulators may have other ends in mind than raising the value of production. But the opportunity is there for government regulation to improve on the market. In my Social Cost paper, I said: "direct government regulation will not necessarily give better results than leaving the problem to be solved by the market or the firm. But equally there is no reason why, on occasion, such governmental administrative regulation should not lead to an improvement in economic efficiency."

My puzzle is to explain why these occasions seem to be so rare, if not nonexistent. One explanation would be that these studies happen to have involved cases in which there was a failure of government regulation and that further investigation will uncover many examples of success. But it is hard to feel much confidence in this explanation—the studies have been so numerous and their range so extensive and some of the cases of failure are found where one might have expected success, for example, the control of monopoly, the regulation of drugs or labelling, and zoning. Another explanation would be that this is the way of the world—that the costs of government are always greater than they would be for the market transactions that would accomplish the same result. But I regard this as unplausible.

JUGGERNAUT

I have come to the conclusion that the most probable reason why we obtain these results is that the government is attempting to do too much—that it operates on such a gigantic scale that it has reached the stage at which, for many of its activities (as economists would say) the marginal product is negative. We would expect to reach this stage if the size of an organization were allowed to expand indefinitely. I suspect that this is exactly what has happened. If further studies confirm that this really is the situation (and I suspect they will), the condition is one which can only be cured by a reduction of government activity in the economic sphere. This will not be easy to achieve since it runs counter to prevailing attitudes. Oddly enough, the finding that many governmental activities do more harm than good is likely to be received sympathetically. It is common enough to read an article or the account of a speech of which the first part consists of a denunciation of the inefficiency and corruption to be found in the administration of some government program—but this is often followed by a second part which draws our attention to some pressing social problem coupled with the proposal that the government set up a new program or agency or expand an old one to deal with this problem. To ignore the government's poor performance of its present duties when deciding on whether it should or should not take on new duties is obviously wrong (old duties were once, in the main, new duties). But the sanguine view of what the government will accomplish induced by this way of thinking tends to lead to an ever expanding role for the government in economic affairs (and has done so). If I am right that the attempt to carry out these new activities leads to the government performing worse those that it is already undertaking, the continued expansion of the government's role will inevitably lead us to a situation in which most government activities result in more harm than good. My surmise is that we have reached this stage.

PROBLEM SIMPLIFIED

This makes an economist's task in one respect easy and in another difficult. It becomes easy because at the present time the advice that has to be given is that all government activities should be curtailed. Our task is made more difficult because our experience with the present over-expanded governmental machine may not give us much indication of what tasks the government should undertake when the sphere of government has been reduced to a more appropriate size. But perhaps I exaggerate the difficulty. The move to a smaller government is hardly likely to be swift—and we will gradually be able to accumulate the information needed to discover what functions should be left to the government.

But all this assumes that the investigations of economists will, as Professor Stigler claims, in the end have a decisive influence on public policy. Whether the economist will be more successful in limiting the role of government than he has been in policies directly concerned with the operation of markets and the pricing system remains to be seen. But as I have indicated, even a modest success is not to be despised.

Dr. Coase is a professor at the University of Chicago Law School and editor of The Journal of Law and Economics. This article is based on a lecture he gave at UCLA this spring.