The Governmental Habit

The Governmental Habit, by Jonathan R.T. Hughes, New York: Basic, 1977, 260 pp., $11.95.

This is perhaps the strangest mixture of brilliance and nonsense since Forrest McDonald's Phaeton Ride. Not until the last chapter was it clear that the brilliance would, on balance, win out.

The book jacket comes with profuse praise from the economic historian Douglass North and the novelist John Kenneth Galbraith—two men whose views on the appropriate degree of government intervention in the economy are about as different as possible. The apparent paradox is quickly resolved in the first chapter, where Hughes writes that "the federal nonmarket control structure is a half-way house, without the virtues of either economic planning or free-market economy." Neither a planner nor a free marketeer could be entirely unhappy with such diplomatic ambiguity.

But Hughes doesn't really view "economic planning" as a serious alternative. He offers copious illustrations and juicy quotes to prove beyond reasonable doubt that the encroachment of government regulation has been more or less continuous throughout US history and that it has been uniformly disastrous.

Colonial America adopted large chunks of the "economic planning" apparatus of medieval England, including compulsory labor for "vagabonds," controls on prices and interest rates, monopoly franchises for ferries, toll bridges, inns, and breweries, and, of course, a government monopoly on counterfeiting.

In the period of continental expansion, the narrative gets bogged down in a discussion of uncertain relevance about how land was distributed. But we also learn something about the notoriously incestuous relationship between the government and the railroad and canal builders, and also about the lucrative practice of licensing professional and business monopolies.

On the subject of banking and money, Hughes comes closest to praising government control. He describes the period when we had no central bank, from 1836 until the Civil War, as an "utterly chaotic currency system." There were two financial panics, two decades apart, and one depression. But prices were remarkably stable from 1840 to 1860 (not downward, as Hughes suggests); employment and real output doubled; and the US economy absorbed one and a half million potential victims of the Irish potato famine. It wasn't too bad a performance, and it would be hard to find two decades of central banking experience that have been more tranquil.

After the panic of 1907, writes Hughes, Congress "had probably seen enough of the gold standard's automatic workings." Another low blow. The main source of the brief 1907 panic was a scramble for liquidity (currency on the part of the public, reserves on the part of banks) due to some dubious investments of Knickerbocker Trust. Gold had almost nothing to do with it. Friedman and Schwartz even use 1907 as an example of how thousands of bank failures in 1929-33 should have been avoided.

Hughes has other curious ideas about money and inflation: "Wages and prices tend to rise when money is plentiful. Both situations are favorable to the interests of manual workers, farmers and debtors in general. Those who lend money, on the other hand, are favored if prices and wages are stable or falling." Inflation in wages and farm prices is obviously not favorable to workers and farmers unless it exceeds the inflation in the prices they pay—which is rarely true for long. The largest net debtors are governments and corporations, and they benefit from inflation only if it has not been expected (and therefore not incorporated into interest rates).

The historian's view of the actual workings of antitrust law are far more realistic than the popular view, which simply assumes that good intentions produce good results. In practice, the US antitrust tradition has, as Hughes indicates, "implied that competition leads to monopoly, so too much competition…must be forbidden."

There are, however, several instances of a fast-and-loose approach to issues that deserve more thought. We are told that the 1918 Webb-Pomerane Act was the cause of the OPEC oil embargo, but not told how or why. We are told that "corporate concentration" has become "astonishing," but not told whether it has increased (it hasn't) or whether it has any significance (it doesn't). We are told that the decline in the number of US farmers since 1936 caused the global food shortage in 1973, but not told that the farm output per farmer soared in that period.

When he gets to the New Deal, Hughes leans safely on ancient slogans instead of evidence. The depression is variously described as "a consequence of World War I," "a malfunctioning of American capitalism," or the consequence of "the indifference, folly, cynicism, hypocrisy, and morbid pessimism of the Hoover government." There isn't an ounce of explanation in any of this.

"If the New Deal failed to end unemployment," says Hughes, "it was for lack of muscle, not lack of movement." How about a lack of brains? You don't end unemployment by restricting farm output and world trade, raising wage rates, cartelizing banking and industry, and boosting taxes every year or so to finance leaf-raking exercises. The federal jobs programs, says Hughes, "put money into circulation." But all they really did was move money from productive to relatively unproductive uses. It is flatly untrue that "the millions of unemployed and poverty-stricken thus supported were the human consequences of market procedures and decisions." They were the consequences of federal monetary, fiscal, trade, and regulatory policies.

Hughes is moved by good instinct and bad theory. Like Hoover and FDR, he confuses wage rates per hour with total wages received and therefore argues that "further wage reductions hardly seemed a practical solution to the collapse of consumption expenditures."

Moving into recent decades, Hughes argues that the combination of income tax withholding and the link between federal budget deficits, money creation, and inflation means that "inflation makes deficit spending self-financing via progressive income tax schedules." The result is an ever-increasing share of income going to Uncle Sam. So far, so good. But the author tries to blame the growth in government on "military procurement," without mentioning that the share of the budget going to defense has fallen from 58 percent in 1955 to 24 percent today, and over 58 percent of that money goes for salaries, not arms.

The final chapter blossoms beautifully, arguing that unchaining the private sectors offers "the only real possibilities of cost-reducing innovations that could raise real output enough to offset the inflationary tendencies of the spending and control policies of the federal government." But Hughes is trapped by his dismal theme that "the nonmarket controls came into existence because, put bluntly, Americans distrust capitalism in its purest form" and "To some extent the system we have, then, was imposed upon us by 'history.'"

If the existing system of taxes and controls accurately reflected what most people really want, and their wants really were determined by history, it would be virtually impossible to reverse the recent destructive impulses. But that explanation requires a powerful faith in the outcome of political processes as constituting the revealed preference of the majority, plus an unsavory dose of historical determinism. The importance of ideas, power, and the self-propelling momentum of bureaucracy are not so easily ignored.

By and large, this is a fascinating volume, revealing one more scholar's partial disillusionment with the proliferation of bureaucratic interferences with personal and economic freedom. The author's remaining illusions flaw particular passages but do not undermine the general theme that piecemeal government supervisions over the years have now accumulated into an iron net holding back any further economic progress.

Alan Reynolds is a contributing editor and columnist for REASON.