[Note for bibliographic reference: Melberg, Hans O. (1997), The pros and cons of
state intervention, http://www.oocities.org/hmelberg/papers/970630.htm]
The pros and cons of state intervention
A review of Skidelsky's The World After Communism
by Hans O. Melberg
Robert Skidelsky
The World After Communism: A Polemic for Our Times
London, Macmillan, 1995
ISBN: 0 333 62274 x
212 pages
Introduction
To what extent should the state intervene in society? In The World After Communism
Robert Skidelsky tries to answer this question. The organizing principle for his answer,
is the idea of collectivism which is discussed from different angels in eleven chapters.
The main argument is simple:
"Collectivism - the belief that the state knows better than the market, and can
improve on the spontaneous tendencies of civil society, if necessary by suppressing them -
has been the most egregious error of the twentieth century ... My contention is that this
belief in the superior wisdom of the state breeds pathologies which deform, and at the
limit destroy, the political economies based on it." (preface, xiii )
I shall argue that the book succeeds quite well in explaining why the idea of
collectivism managed (manages?) to grip people's minds. The book is less good at
developing a systematic overview of the consequences of collectivist thinking, although
there are many scattered ideas.
The causes of collectivism
Collectivism has already been defined as the belief that "scientific" state
intervention can improve the "blind forces" of the market. One result of this
belief is that "In a collectivist society the state enlists the law to serve its
aims; in a liberal society the law sets limits to what a state can do" (p. 19). An
example could be laws about smoking. In Norway the state uses laws regulating smoking
(e.g. taxes and prohibiting smoking from public buildings) in order to change people's
behaviour - to make people smoke less. Another example could be laws against
discrimination. Once again, the law is used to discourage certain forms of behaviour which
would otherwise have taken place if people were left to regulate themselves. A third
example is the use of the State to redistribute income - a form of intervention disliked
by liberals (in the Europeans sense of the word) and favoured by the collectivists. These
examples illustrate the difference between the collectivist and the liberal use of the
State and the law.
The degree of collectivism in different countries can, Skidelsky argues, be measured by
four important variables: The fraction of output spent by the government; The fraction of
output produced by the state; The amount of interference with cross-border trade (tariff,
quotas, subsidies, exchange controls, restrictions on migration); And, the progressiveness
of the tax system (p. 24). Admittedly, these are rough and imperfect measures, but I shall
not argue about these details.
What are the causes of collectivism? In other words, why and how did people start to
believe that we could and should use the state to improve on the outcome of the free
market? Skidelsky provides a long list of causes, some obvious, some interesting and some
dubious.
One obvious and often cited cause of larger government intervention, is war. In the
words of Skidelsky:
"The war seemingly disclosed a world of reality which corresponded to the world of
the collectivist imagination; it showed that collectivist organizations worked, and it
created revolutionary situations which enabled collectivists to seize power ... War has
thus been a powerful agent of collectivism." (p. 45)
Another cause of the ideas of collectivism, was the rise in large corporations. Much in
the same way that wars demonstrated the practical feasibility of large scale state
intervention, the large corporations showed the feasibility of large scale planning of
production. Later people discovered that the seemingly innocent inference from
"private planning works" to "state planning works" was flawed.
A third factor making intervention feasible, was the growth of science. New forms of
communication, increased power of calculation, and new knowledge in general made the
impression that the administration of society was a mere question of accountancy on a
large scale. Not only did science make intervention look feasible, it also made it look
desirable. Intervention in the natural sciences were successful (breeding etc.), and
vulgar social-Darwinism made it look like a country had to have active intervention to
survive international competition. In short science appeared to make collectivism more
feasible and desirable.
As mentioned, showing that collectivism became more feasible is not enough; we must
also show why people thought that intervention was desirable. An important contributor to
this idea, was depression (1873-96 and the 1930s). On the surface it appeared that the
free market did not produce optimal results - large scale unemployment being the most
obvious sign of this failure. This was clearly an important factor making people believe
that planning could improve things: The market was bad, so planning must be better. One
might argue that the inference was incorrect - that the depression was cause by
intervention (the Hawley-Smoot tariffs), and not by the free market. Regardless of the
truth of this argument, it is still correct that the depression was perceived as a
free-market phenomena, and as such it contributed to the belief that intervention was
desirable.
A second cause of the rise of the perceived desirability of collectivism, was
modernization. In short, "'Modernization' enlarged, exposed or created 'gaps'
in inherited systems of social self-regulation which the state was bound to fill ..."
(p. 33). Examples include the increased need for education, health insurance, and
regulation as a consequence of industrialization and urbanization. A second, and related,
feature of modernization was the growth of international trade (p. 34). Increasing
possibilities for trade gave rise to collectivism, since it was believed that intervention
in trade could improve a country's international ranking. This kind of economic
nationalism led to protectionism (tariffs, quotas) and intervention in home production
(subsidies and state ownership of factories).
Another powerful force making people believe that intervention was desirable, was
ideology. Specifically, Marx's concept of exploitation served, in the words of Skidelsky,
as the "charter myth" used to justify intervention. The argument being that it
was only fair to tax the rich and give the money to the poor since the tax represented
"the unpaid portion of working-class toil" (p. 30). In brief, the workers were
underpaid, the capitalists overpaid, and intervention could improve this imbalance [note:
see Jon Elster's Making Sense of Marx for an interesting argument that the workers
really were underpaid; Paying each worker according to marginal revenue means treating
each worker as if he were the last to be hired, but all workers cannot be the last to be
hired]. Later, the ideas of Keynes was used to justify state intervention, although
Skidelsky often points out that Keynes himself was a liberal who would not have accepted
everything that later was done in his name. In any case, ideas and ideologies contributed
to the belief that intervention was desirable.
Skidelsky does not only discuss the factors explaining the rise of collectivism. The
popularity of collectivism changed over time, and to explain the reduced popularity one
must focus on factors working against-collectivism. Once again they conveniently come in a
pack of three: The defeat of fascism in World War II; The success of the German and the
Japanese economy; And, a number of leading intellectuals who exposed the logical and
empirical weaknesses of collectivism.
The defeat of Germany, Italy and Japan in World War II greatly reduced the prestige of
the fascist version of collectivism. However, the war also served to enhance another
version of collectivism - Communism. Being on the winning side of the war gave Stalin and
Communism international prestige and sympathy. The more unsympathetic features of the
regime - like the Stalinist terror and GULAG - was partly unknown, partly ignored. One
reason for this, Skidelsky suggests, was that there were no visual images of Stalin's
concentration camps. In contrast, there was overwhelming visual evidence from Germany's
concentration camps. In this case pictures spoke louder than words, and maintained the
illusion that the left wing version of collectivism was different than its right wing
brother.
After the war, the US greatly contributed to the building of liberal societies in Japan
and Western-Europe though its direct involvement in Japan, and more indirectly through the
Marshall aid. Without this aid, the chances of a collectivist parties (Communism) coming
to power would have been much higher. Also, the very success of these countries - the
German wirtschaftwunder and the remarkable recovery in Japan - contributed to the
belief that liberalism worked. In contrast, the fact that East Germany had to build the
Berlin wall to keep its citizens from fleeing, contributed to the belief that collectivism
did not work.
The third factor working against collectivism, was several new and important
intellectual contributions. Popper exposed the unscientific basis for
"scientific-Marxism" in his The Poverty of Historicism. The argument was
simple - a theory is scientific if there is evidence which can be used to falsify it.
Parts of Marxism can certainly be falsified (like the theory of the falling rate of
profit), can be falsified, but as a body of theory it was unfalsifiable. Whatever evidence
one threw at the Marxist, they could come up with a theoretically possible (but often
empirically implausible) way of fitting the observation to confirm their own world view.
For some illustrations, consider first Marx prediction that the workers would experiences
growing immiseration - a prediction which soon was proved wrong. To explain away this
problematic piece of evidence against Marxism, Lenin invented the theory of Imperialism as
the highest state of capitalism (p. 36 in Skidelsky). Briefly, the argument was that
immiseration was not taking place because the capitalists had bribed the workers with
profit from their colonies [note: This is empirically wrong since the costs of having
colonies often exceeded the monetary benefits for countries as a whole]. These examples
can be multiplied: When social mobility increased, this was not a real advance, rather it
was a plot by the capitalist class to deprive the workers of their best and brightest
leaders; When the state introduced legislation which favoured the workers, the theory that
the State was a tool for the capitalists had to be amended by a theory of the relative
autonomy of the state. In this way Marxists continually found refuge in more and more
implausible arguments against evidence that Marx was wrong. An ideology with these
self-confirming qualities could never be scientific - it could not be logically proved or
disproved, as Popper pointed out.
Another important intellectual development, was Hayek's Collectivist Economic
Planning (1935) and The Road to Serfdom (1944). Once again the argument was
relatively simple: It was practically and theoretically impossible to make efficient plans
without free-market prices. The practical problems should be obvious - imagine trying to
decide how much should be produced of thousands of goods when the production of each good
also depend on the other (if you want more refrigerators you also have to produce more
steel). Theoretically, without information about prices there is simply no way of
determining whether some investments are more profitable than others. The theory is that
those investments with the highest net benefit (benefit minus cost) should be chosen.
However since there are no real prices there is no way good way of estimating the costs of
a project. Hence, central planning could not solve what has been called the problem of
economic calculation.
Based on Skidelsky I have so far presented nine factors which made the idea of
collectivism more or less appealing. Three focused on the increase in the perception that
state planning was feasible (war, large corporations, science), another three centered on
the idea that intervention was desirable (depressions, modernization, ideology), and the
last three factors emphasised forces working against both the feasibility and desirability
of collectivism (defeat of Fascism, success of Germany and Japan, intellectual
developments). I shall now go on to discuss the more interesting question of the pros and
cons of intervention - as opposed to the sociological history of the idea of intervention.
The pros and cons of state intervention
Whether intervention is good or bad - or more importantly whether the net effect of
intervention is positive or negative - should be determined by examining the consequences
of the intervention. Sometimes Skidelsky seems to disagree with this, as when he writes
that:
"The issue here is not whether state taxation and spending policies, or public
ownership of industry, or regulation, create a society more of less efficient or just than
it would have been in the absence of such features. It is that they create a society which
is different from what it would have been. Herein lies the chief flaw of collectivism. It
is that, outside exceptional circumstances, the degree of consent for the reshaping of the
economy and society is always more limited than the ambitions of the collectivists."
(p. 26).
At least the first part of this quotations suggests that state intervention is
inherently an evil thing, much the same was as murder is inherently an evil thing. If this
is true we need not examine the consequences of intervention, However, I think most people
take a more pragmatic view: State intervention is more acceptable when it has consequences
which we on balance find desirable, such as promoting material well being or justice.
Even if we agree to focus on the consequences of state intervention, we need to
distinguish between the static and the dynamic consequences of intervention. For example,
a monopoly may be statically inefficient in the sense that it charges too high prices
compared to the competitive outcome. However, one might argue that monopolies nevertheless
are good since they are dynamically more efficient than competitive firms. Precisely
because they can charge high prices they earn more profit, which means that they can
invest more in research and development. This, in turn, means that they might develop more
efficient production techniques which ultimately will benefit the consumers. One may doubt
the empirical validity of this argument, but at least it illustrates the difference
between static and dynamic efficiency. The question is then: What are the static and the
dynamic benefits and costs of state-intervention?
Skidelsky presents four arguments which he thinks are valid reasons for the state to
intervene, or as he puts it "state activity which supports a liberal society
..." (p. 20). First, the state should use the law to protect people from harms - for
example food standards and licensing laws. Second, the state should provide public goods,
such as defense and street-lightening. Third, the state may provide a social safety-net
since the market fails to provide this kind of insurance. Fourth, the state may help to
promote self-regulation - for example creating professional standards. A unifying concept
for all four arguments is that of market failures - intervention is justified when the
market fails (and the intervention is no worse than the disease itself). Hence,
Skidelsky's view is that "States may be regarded as existing to fill the inevitable
gaps in the protective and regulatory mechanisms of civil society... " (p. 20).
All of the arguments above, Skidelsky thinks, can be abused. The concept of harm can
become too wide, thus the first argument - to protect people from harm - can be used to
create a 'nanny' state. The existence of mixed goods and externalities can be used to
justify almost any intervention - such as strict laws against smoking. The argument based
on a social safety net can easily spill over into an argument for using the state to
redistribute income from the rich to the poor. Finally, state intervention to help
intermediary organization can develop into corporatism - a situation in which the
organizations function as an extended arm of the state i.e. they loose their independence.
There is little new in these arguments, and the warning against the abuse of the
arguments for intervention is not too enlightening. The problem is that Skidelsky's
arguments are too general to be helpful to determine the exact limit between acceptable
and unacceptable interventions. Most people accept that the government has to provide some
regulation to protect people from harm. It is equally obvious that the concept of harm can
become too wide, thereby producing too much bureaucracy and regulation. The difficulty,
however, lies in deciding exactly when we use a too wide definition of harm. Exactly when
does state intervention turn from being supportive of liberal order into undermining this
order? Have we gone too far when we have laws prescribing seat-belts? Are laws restricting
smoking in public buildings collectivist, or a justifiable intervention to protect the
non-smokers from unwanted pollution? To say that the concept of harm, or the concept of
externalities, can be abused is thus not very enlightening since an argument which you
think is too wide, may be perfectly acceptable for another person.
Against the four mainly static argument for state intervention, Skidelsky presents
several dynamic arguments against intervention. These all deal with "the logic of
collectivist creep" (p. 65), meaning that what appears to be a good intervention is
bad if we consider its consequences over time. In effect, one intervention leads to
another and so on. We may call this the "the slippery slope argument."
One such slippery slope, results from intervention in international trade. Initially
one may (mistakenly) believe that this is a good intervention - enabling the country to
become more self-sufficient, competitive and wealthy. However, Skidelsky argues that if we
want to manage international trade (tariffs, quotas), we are also forced to engage in some
planning on the national level (p. 65). This in turn, leads to more planning and
eventually nationalization and restrictions on emigration and immigration. I must admit I
failed to see the necessity of this logic, though I concede the that it is a possible
tendency.
A more interesting "slippery-slope-argument" is Hayek's statement that except
in a war there is not enough voluntary consent to support government intervention. Thus
the attempt to change people's behaviour fails, leading to calls for even stronger and
more intervention (coercion) in order to fulfil the aim. This kind of logic leads to an
"inexorable tendency for democratic planning to become totalitarian planning."
(p. 80). For example, assume the government prohibited all smoking tomorrow. It seems
likely that this would require quite a lot of coercion. Now, assume instead that the state
puts a tax on cigarettes. Unless one counts the tax as coercion, this measure seems quite
likely to succeed reasonable well. The tax might, however, increase smuggling which in
turn leads to new laws and increased intervention in civil life (to prevent smuggling).
Despite this tendency, I think it is exaggerated to argue that it necessarily will
lead to totalitarianism.
More generally, I think it is possible to maintain a mixed system. The logic of the
slippery slope argument is that we have to end up in one extreme solution: a very small
state or a very large state. I think the choice is more a question of degrees - more of
less state intervention. Maybe the most important mechanism making this balance possible,
is the existence of democracy. As Skidelsky shows, when people think there is too much
regulation, they simply elect a party which promises to reduce the amount of intervention.
True, this mechanism is imperfect, for example even in a democracy a majorty might ignore
state-interference with minority groups (e.g. religion). However, these faults are also
reducible, for instance through constitutional rights. Thus, I do not think the choice is
between extreme versions of liberalism or collectivism, but between degrees of state
intervention.
Lastly, I am unconvinced about the argument that redistribute policies are inherently
evil. Progressive taxation - to tax the rich more than the poor - is attacked by the
liberals as theft from the rich. What we earn, the argument goes, we should be free to
spend as we want. Thus, it is a question of rights: We are entitled to the fruits of our
own labour. I do not disagree with this, but the problem is that we should also consider a
number of other rights that people have. For example, one might claim that people have the
right to equal opportunities to make money (which implies equal access to a good
education). Or, more basically, that people have the right to food and medical care. The
problem, then, is that some rights might clash (at least in a world of scarce resources),
and to focus exclusively on the right to keep everything you receive is to ignore the
other rights people also have.
Overall, I was not too impressed by Skidelsky's discussion of the costs and benefits of
state intervention. It is not novel, it is not systematic, complete or rigorous, and it
relies more on general arguments than concrete examples. Most importantly, we cannot use
his arguments to determine the degree to which the state should intervene since he relies
on inherently subjective notions like "too wide definition of harm" to dismiss
some interventions. As I have argued, there is no agreement on when the definition of harm
becomes too wide. Indeed, this is precisely the disagreement which we would want to
discuss.
Recommendations and interpretations
The sub-title of the book, A Polemic for Our Times, indicates that there should be
some lessons for current policy formation. In addition to the main focus of this review -
state intervention - I would like to discuss a two of Skidelsky's other recommendations.
First, the warnings about expanding NATO. Second, the advice not to give large-scale
financial aid to Russia.
NATO should not be expanded eastwards, Skidelsky thinks, since this would weaken the
position of the progressive forces in Russia (p. 185). Instead we should develop a new
all-European security system which includes Russia. I have no firm opinion on this issue.
However, it seems like the possibility of gaining membership in NATO has positive effects
on some policies in many Eastern European countries. For example, countries are more eager
to conclude old border disputes, to respect the right of minorities, and to implement
market reforms since this increases their chances of NATO membership. In this way NATO
membership is a good way of promoting what I think are right policies for these countries.
Whether this beneficial effects should be scarified in order to please Russia is a
question I cannot answer.
On the question of financial aid to Russia, I agree with Skidelsky. The Marshall aid
worked because the institutional structure of these countries was already geared towards a
market economy. Russia is totally different (see p. 69). Much of the aid would end up in
the hands of the wrong people. Moreover, foreign intervention like this breeds hostility
and rent-seeking. It feeds the paranoid belief that the West governs Russia (with the aim
of turning it into a colony which only produces raw-materials), and it will focus the
attention of the elite on getting a share of the aid instead of focusing on productive
activities. No, Russians must put the Russian house in order. (Incidentally, there seems
to be a small contradiction between the recommendation not to give financial aid on p. 70,
and the recommendation to "gamble" "generously" on the new Russia
which includes the argument that "Western investment in the Russian state is deemed
by hard-headed self-interest [to prevent collapse]" (p. 185))
Conclusion
I am uncertain whether to recommend this book. One the one hand, it is highly readable,
the scope is very large. and many of the arguments are important. On the other hand, it is
not novel, systematic or rigorous. In sum, this is a good book if you want a relatively
short, easy and good overview of some of the issues in modern political economy. However,
if you want a complete academic treatment of state intervention your desire is better
served by other books.
Afternote:
1. I believe there is a small mistake on page 113. The article giving the communist the
leading role in Soviet Union, was not article 16, but article 6.
2. The following quotation deserves space:
"The trend of political economy in the twentieth century may be summed up as
follows. The tremendous increase in the political, administrative, and organizational
capacity of the state, together with its power of economic calculation, has tempted it to
do too much. As the performance of states worsened, so the resistance to their pretensions
grew, forcing a retreat freom collectivism back to the market economy. This is the meaning
of the transistion through which we are living." (p. 26)
[Note for bibliographic reference: Melberg, Hans O. (1997), The pros and cons of
state intervention, http://www.oocities.org/hmelberg/papers/970630.htm]