Abstract
After the financial crisis in 1929, the state began to grow as never before. In the European democracies, “social control”, the exclusive assignment of key industries to state-owned enterprises and organisations, and state planning of the economy were considered by “social democrats” as main pillars for their societies to function properly. In their view, it did not matter that the proposed arrangements were inherently inefficient and authoritarian. To them, it sufficed that certain strategic sectors of the economy were controlled by the state and could be used as levers for pursuing developmental and other social objectives. In this chapter, we explain how citizens were seduced by this rosy vision and classical democracy gave way to the current contemporary democracy, which is representative to some extent, but voluntary exchanges, and hence freedoms, have been restricted significantly.
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Notes
- 1.
Higgs (1997) states that, in a survey regarding the business climate that prevailed at that time, most American businessmen were reluctant to undertake new investments because they were afraid that the free market economy would be replaced by some form of collectivist economy.
- 2.
According to Eichengreen (2007a, 6), while Europe realised its potential until the 1970s and achieved an “extensive” growth, as he defines it, Europe failed to capitalise on its innovating potential so as to achieve an “intensive” growth as well. The cause to which he attributes this failure is that the institutions on which European growth was based before 1970 (e.g. the cooperation of banks with large enterprises, employment protection, etc.) were not appropriate to encourage and assist entrepreneurship and the innovation to which it leads.
- 3.
- 4.
These figures come from Tanzi and Schuknecht (2000, 7, 52, 62, 65).
- 5.
To a considerable extent, the nationalisations concerned businesses in financial distress or unprofitable, and quite likely, they were carried out by coercive means. The coercive tactics against companies and individuals are confessed even by proponents of social democracy, such as Holland (1975, 123), who writes:
The planners were part industrial consultants, part banker, and part plain bully. They could only be this by going below the level of individual sectors and messing their hands with individual firms—normally the leading mesoeconomic firms within the sectors. The technique involved getting the managing director of company X into the Ministry of Finance and letting him know that, unless he did A, B and C, the ministry would not hesitate to channel funds to his principal competitors Y and Z, grant them government contracts, concessions, etc., and permit them to encroach on his own market share.
- 6.
Observing the rigidities and distortions that the economic policies of Roosevelt created, Anderson (1940) warned about their negative effects on economic growth and advised the liberalisation of the economy by discarding the heavy interventions of the state.
- 7.
Moreover, the ultimate goal of the communists was carefully hid behind social democracy. For example, this is what Togliatti, a leading member of the Italian Communist Party, wrote in 1956:
Tomorrow we may even discuss our differences … Today we must defend the socialist revolution …When the guns of the counter-revolutionaries are in operation one must be on one or the other side of the barricades. There is no third camp. (Sassoon 1996, 263)
- 8.
- 9.
- 10.
Famous is the reference of Keynes (1936, 162) to “animal spirits”, which are responsible for “inciting spontaneous action” on the part of individuals and which if “dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die”.
- 11.
As a matter of fact, in one occasion that he had to convince politicians to increase government spending, while maintaining a balanced budget, Keynes (1931, 236) proposed to postpone paying social benefits and instead spend the funds in public infrastructure to reduce unemployment. This explains why in the open letter he wrote to US President Roosevelt, Keynes (1933b, 36) noted:
It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads.
- 12.
As Keynes and Henderson (1929, 114) emphasized:
For the object is not to develop state enterprise as such. The object is to develop and equip the country through the instrumentality of such forms of organisation as already exist and lie ready to hand.
- 13.
Congdon (2007, 33–43) notes that renowned descendants of Keynes, such as Robinson, Harrod and Kaldor, expounded economic policies which were based more on their own socialist ideas and less on the writings of Keynes. For this reason, when referring to these policies below, we shall call them “Keynesian” to indicate that they differ from the policies suggested by Keynes.
- 14.
Leijonhufvud (1968) explains in detail the differences in the economic thought of Keynes and the economic models and ideas that were developed by Keynesians. Also, Booth (1983) demonstrates the deviations of “Keynesian” economic policies from those of Keynes in the UK immediately after the Second World War. In the same spirit, Tily (2003) criticises the followers of Keynes who distanced themselves from the substance of Keynes’s proposals for a monetary management of crises and insisted on the implementation of expansionary fiscal policies.
- 15.
Durbin (1989) explains how various positions of Fabian socialism influenced the economic policy agenda of the Labour Party.
- 16.
Unlike his followers, Keynes (1942a, 204–5) expressed serious reservations about the expansion of social welfare (mainly pensions), which would add a significant burden on the public budget, as it was proposed by Beveridge in 1942.
- 17.
It is worth noting that leading economists, such as Kaldor (1944) and Haavelmo (1945), suggested that, with balanced budgets, the transfer of resources through taxation from individuals to the state would have major positive effects on the growth of aggregate demand and hence on the absorption of unemployment.
- 18.
According to Rothbard (1974, 61–5), many intellectuals supported wholeheartedly the expansion of the state into the private economy for two reasons: first, because state authorities buy their services at lucrative remunerations and, second, because intellectuals are uncertain about the value that markets may attribute to their services.
- 19.
For further details in this respect, see Glossner (2010, 32–46).
- 20.
In particular, President Truman in his 1951 Economic Report of the President emphasised that:
… we should make it the first principle of economic and fiscal policy in these times to maintain a balanced budget, and to finance the cost of defence on a ‘pay-as-we-go’ basis. (Balassone and Franco 2004, 6)
Moreover, drawing on the analyses by Weinberg (1953) and Burkhead (1954), we can surmise that the USA did not adopt Keynesian policies until 1960 because, due to the optimism from the rising domestic and international consumption, private investments pushed the economy into a state of full employment of the labour force. On the contrary, many Western European countries applied strong Keynesian policies from the end of the war, which included even extensive nationalisations.
- 21.
It is worth noting that up to 1929, public expenditures as a percentage of GDP in the USA never exceeded 12 % and that in 1928, they were only 3 % (Friedman and Friedman 1980, 58).
- 22.
Although after the war and until the early 1970s rapid economic growth had alleviated the crises of unemployment and increased markedly per capita incomes, these results could be attributed to endogenous economic growth mechanisms, such as entrepreneurship and technological progress, rather than Keynesian policies. Also, Hicks (1974, 3) notes that these results did not come about from the pressures of socialists to increase public spending.
- 23.
The review paper by Roniger (2004) leaves no doubt that, even in the so-called advanced democracies, patronage among organised minorities and politicians is quite strong and that it gives rise to many detrimental effects to general welfare.
- 24.
An interpretation of this syndrome is given by Froelich et al. (1971). According to them, its source is the pursuit by some people to become leaders in society because of the “leadership surplus” they may enjoy, which is not necessarily material (i.e. income) but may be psychological, as the fulfilment of ambition and vanity.
- 25.
- 26.
Such claims were made, for example, by Wilczynski (1970, 53, 80–1, 161 212–6 and 1973).
- 27.
This weakness was highlighted by Cairncross (1970, 15, 20–2), who held various government advisory posts in the United Kingdom.
- 28.
Tufte (1978) notes that the models which consider the electoral cycle, where the ruling party increases social benefits and income supports before the elections and reverses course afterwards, are insufficient to explain why there are so many cases where the ruling party lost the elections.
- 29.
Numerous empirical studies have shown the negative impact of corruption and malicious interlocking on a country’s economic, social and cultural progress. Even though occasionally it is argued that, despite the high degree of these dysplasias, certain countries have achieved strong GDP growth and investment, in a related OECD study, it is explained how these countries would have performed even better, if they had less corruption (World Development Report 1997, 103–5). Also, Rothstein and Uslaner (2005) corroborated empirically that countries, where corruption and malicious interlocking between the state and organised minorities is high, experience considerable losses of trust among citizens. This in turn increases transaction costs and slows economic growth.
- 30.
Consistent with the last hypothesis are the findings by Lambsdorff (2007, 2–4, 10–3, 89–95, 110–20).
- 31.
Niskanen (1975) and others have confirmed this behaviour in the USA. Therefore, we can reasonably assume that the situation will be worst in countries with less transparent and more authoritarian democratic regimes.
- 32.
The great dangers that emanate from this process for democracy have been stressed by many philosophers and economists. For an example, consider the following warning by Popper (1945, II, 181):
It is undoubtedly the greatest risk of interventionism—particularly of every direct intervention-that leads to an increase in state power and bureaucracy. Most supporters of interventionism do not care about it or close their eyes, which increases the risk.
- 33.
Bureaucracy hampers economic growth not only because it stifles innovative activity but also because, as argued by Williamson (2000), it prevents the correction of various imperfections of the free market economy. In this respect, it has been corroborated theoretically and empirically (see, e.g. Ardagna and Lusardi 2009) that the more government regulations in starting, operating and closing enterprises, the less economic growth. Another derivative of many state regulations is that they render the profession of lawyers most attractive. But from Murphy et al. (1991), we know that economies with many lawyers instead of engineers have low economic growth potential because, while lawyers increase transaction costs, engineers increase the efficiency and innovative activity of businesses.
- 34.
Hayek (1960, 120–1) predicted that, as the share of civil servants in total employment would rise, their clout in the political market would increase, thus enabling them to claim economic policy concessions. He was right. Moreover, let us not forget that the various policies are designed and implemented by government technocrats, thus enhancing their ability to bias legislation to their favour (Hayek 1960, 123–4). Finally, it should be noted that the tenured or quasi-tenured regime of employment of civil servants reduces their performance unless, as Tullock et al. (2002, 11–2, 58–9) have found, their performance is monitored closely.
- 35.
As shown by Krueger (1990), often under pressure from trade unions, private companies that go bankrupt and must be dissolved become state enterprises with a host of painful results for society.
- 36.
For those who insist on ignoring what happened during the long process of transition from classical to contemporary democracy, the following passage from Rothbard (1972, 69) may be enlightening:
Industry after another has been regulated into decline: the railroads, electric power, natural gas, and telephone industries being the most obvious examples. Housing and construction have been saddled with the blight of high property taxes, zoning restrictions, building codes, rent controls, and union featherbedding. As the free market capitalism has been replaced by state capitalism, more and more of our economy has begun to decay and our liberties to erode.
- 37.
This designation of the voracious expansion of the state comes from Hobbes (1651).
- 38.
As argued by Olson (2000, Chap. 2), democracy cannot be viable without the rule of law, that is, if it cannot guarantee the sanctity of property rights as well as the enforcement of contracts. We should not forget that property rights reflect in essence the nexus of individual and group motives and these in turn are reflected to a great extent in the economic, social and political situation in the society.
- 39.
Using data from the OECD countries, Alt and Lassen (2006) found that the greater the lack of transparency and partisan polarisation in the governance of a country, the higher are the state deficits and debt.
- 40.
In the first chapter, we saw how ancient Athenians, who adopted the first ever welfare state in the world, confronted this problem.
- 41.
- 42.
See, for example, the paper by Marimon and Zilibotti (1999) and the literature to which they refer.
- 43.
Empirical studies that compare the level of unemployment in the USA and Europe have found that in the labour markets of the latter exist major rigidities, which come not only from labour unions but also from regulatory policies. For example, two of the many reasons to which these rigidities have been attributed are the insistence of European governments in the policies of the minimum wage and the subsidies for unemployment. The results have been less growth, higher unemployment, especially among youth, and wage inequality (related analysis and literature can be found in Bitros and Prodromidis 2004). Instead, by researchers such as Johnson (1980), it has been proposed to replace subsidies to the unemployed by wage subsidies and training.
- 44.
As found by Meadowcroft (2008), the trend today is in this direction.
- 45.
Blundell and Robinson (1999, 11–8) have examined the great variety, tasks and effectiveness of different independent monitoring mechanisms for the enforcement of qualitative standards of goods and services in various countries.
- 46.
This example comes from Kleiner and Kudrle (2000) and relates to the dental market in the USA.
- 47.
Several papers in the book by de Jong and Rizvi (2008) analyse the high degree of divergence between the goals set by economic policies and those that obtain in actuality. The main causes for the observed differences are attributed to bureaucracy, the special interest pressure groups, the procedural system that does not lead to equality in front of the law, etc. All of them lead to a situation where the desired outcomes of the policies are cancelled, while those that are realised are often in conflict with the aspirations of the competent authorities.
- 48.
For example, Demosthenes (For Phormio, 44) notes that:
It is remarkable what a striking thing it is in the eyes of people who are active in commercial life and in banking, when the same man is accounted industrious and is honest … If you do not know that for money-making the best capital of all is trustworthiness, you do not know anything at all.
- 49.
The privatisation of Volkswagen was no coincidence. As argued by Oliver (1960), it was expected because many German economists in the aftermath of the Second World War had turned against heavy state intervention in the economy.
- 50.
The relevant data can be found in Eichengreen (2007a, 17–8).
- 51.
- 52.
This side effect is analysed extensively in Bitros and Prodromidis (2004).
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Bitros, G.C., Karayiannis, A.D. (2013). The Contemporary Democracy. In: Creative Crisis in Democracy and Economy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-33421-4_3
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