A Little History of Markets
Gordon Tullock  

Philadelphia Society Meeting
Philadelphia, Pennsylvania
April 13, 2002

Introduction 

You may be interested to know that we passed a very important anniversary.  It is not clear exactly when because the data are not perfect, but sometime in the last two or three years the share of total production that went into foreign trade got as high as it was in 1914.  The period between 1914 and now was a bad in most perspectives. There were mass murder and other social problems, foreign trade decreased dramatically.  Emigration of people from one part of the world to another, something many may object to because they migrate to the United States is also up to the same level as it was in 1914.  Foreign trade is now about where it was in 1914.  In addition international investments are rising rapidly and shortly will be as high a percentage of total investment as they were in 1914.  We have not quite made that level.  The fact that getting up to something which occurred almost a  hundred years ago shows how badly off we were.   

These figures are for the twentieth century.  The nineteenth century was a halcyon period.

Tariffs fell and international trade developed.  A large part of the world’s population moved to the United States, Argentina or Canada.  There was the completion of the industrial revolution – we ordinarily consider the Industrial Revolution to have begun with Watt’s steam engine, but it wasn’t until the nineteenth century that the dramatic effects of the Industrial Revolution were experienced.  Everything else went up also – communication became rapid.  We now look at the steamship and telegraph as decidedly old fashioned (and by modern standards they are), but at the time they were developed, they were regarded as revolutionary.   

Messages were able to go from London to New York in three or four minutes instead of the week it took by sea mail.  The change brought about by the telegraph relative to the mail system was a bigger change than present changes when messages move in fractions of a second. 

In general everything was doing well at that time.  I should point out that we now have the International Monetary Fund and the World Bank to deal with countries that have difficulties in paying their debts.  In that period we relied on a different instrumentality — the Royal Navy.  It worked better.   

In general governments during this period improved, but did not become more democratic.   England did not become a fully functioning democracy in the sense that everyone had the right to vote until 1931. This did not occur in the United States until the 1960s.   We shouldn’t be terribly depressed by this lack of progress in democratic institutions.   

Governments tended to improve in most of their activities.  The most obvious case, torture was abandoned in most countries although it had been used regularly before.  There was also the conquest of the world by European powers.  At the moment imperialism is disapproved of.  However, imperialism is in the process of coming back into favor.  All one has to do is look at the countries that were parts of empires and what they are now.  Given the condition of many former colonies, many would argue it is a good idea to bring the empires back.  If any of you in the audience would like to suggest some former colony in which the citizens are better off now than when they were a colony, I would be delighted to hear it. It is no compliment to say an empire is better than what succeeded it.   No empire went around cutting people’s hands off as happens today in Africa.   

The nineteenth century was a period of growing prosperity and civilization.  Tariffs fell, international trade developed and of course there was the Industrial Revolution. Other improvements included rapid development of communication, science, and travel.  In general governments improved although they did not necessarily become more democratic. There was also the conquest of much of the world by European powers.  Imperialism has a bad name today but now we've seen what happened when the empires dissolved. 

The 20th century is frequently called the terrible century and deserves it.   We had mass murder, wars of unprecedented bloodiness, the restoration of high tariffs, and restrictions on foreign trade.  Scientifically we are making rapid progress, but we were making progress in the 19^th century — it was just from a lower base.   

The Twentieth century was a period of massacre and death which had not been seen since the collapse of the Mongol empires.  Genghis Khan would have regarded Hitler and Stalin and for that matter, Mao Tse Tung as mere amateurs.  The period between Khan and them did not have these kinds of massacres.   

The twentieth century had another important feature. It was also a period in which new and terrible superstitions developed.  Intellectuals seemed to be swept with a series of disastrous orthodoxies.  It is important to note that until 19th-century there was no important body of doctrine which held the government should actually operate the economy.  The economy had a lot of government control of different parts of the economy and it was usually either inept or perverse.  The post office is one example, but there were a number of government run enterprises.  Fortunately actual government control of the economy was not very great.  While there were many activities under government control which I would have preferred otherwise, this did not occur to the same extent experienced by the rest of the world.   

The Marxist superstition was not fully believed by most intellectuals but they regarded it as respectable and certainly better than the free market.  To repeat, this century has been disastrous, in many ways, but we are beginning to recover nevertheless.   

I am going to look over the history for future guidance.   Before the latter part of the 19th-century there was little or no government ownership of the economy, indeed there was not even very much in way of arguments for it.  Where we had government control, it was usually something that had been there for quite sometime.   For example, a feudal lord had owned a large piece of property or some industries (e.g., public utilities) had been started by the  government.  However, there was no real doctrine which argued for government to do this.

I tend to regard this change as due to Karl Marx although I would not argue that Marx actually invented this role of government.   As those of you who have studied Marx know, it might have been Engels.  It is difficult to determine what was written by Marx and what was written by Engels.  I tend to regard Engels as the more powerful, but this as an open question.   

In consequence of the lack of doctrine supporting government provision of various services, government expenditures were by modern standards quite low except during wartime.  There would be a steady period of growth, building up a debt during wartime, and paying off between wars.  The intermediate periods were characterized by low taxes.  The US was exceptionally low, but taxes were low in other countries also.  The  low level of taxes in the US was not due to superiority, but because we had an ocean on either side of us and did not have to have a large military force. 

In general economic developments in 20th century were bad until late 1990s.  Now we seem to be intellectually moving away from this.   Unfortunately there was another 19th-century writer who still holds us in his grip – Prince Bismarck.  Prince Bismarck invented the social welfare state although in all honesty it must be said that his version did not include pay-as-you-go.  It if you look at government expenditures as a share of GNP before the work of Bismarck,  they were low and stable except in wartime.   

Tanzi and Shupnick (2000) have written a book which collects government expenditures as a share of GNP.  I use their numbers and add some which they did not have.  The time that the increase in government expenditures began was different in different countries and different rates of growth also.  Sweden was the record holder but many countries compete.  The United States did not begin to rise until the 1930s which made us somewhat backward as a country.  I remember being told by my high school social studies teachers that we were backward.  We are still comparatively low as a share of government budget.  Occasionally, we are told that if certain laws are not passed, our taxes will become unbearable.  However, even at those levels our taxes are much lower than many European countries.  I am fairly confident we could pay them, but I am not convinced that we should.   

But to return to Prince Bismarck, most modern governments are mainly engaged in requiring their subjects to buy a peculiar and inferior form of insurance.  Prince Bismarck invented it.  We pay in most of our life and then get benefits later. Congress as a matter of fact, raises the benefits so that the people who got in early got a good deal.  The traditional government functions are now but a small part of the government and in many cases, as in the United States,  are mainly carried on by local governments.   

Tariffs are shrinking and government owned industries in many countries are being sold off.  In the last area United States is rather backward, but then we never had as much government owned industry as many foreign countries.  

There is also something that has happened and I don’t know how to explain it.  At the same time a great deal of government control and intervention in the economy developed, but the total cost of this was less than the Social Security Administration.  Fortunately intellectuals are turning against this intervention, particularly since the collapse of Russia.  It is interesting that it is affecting the welfare state.  Not strongly, the welfare state is not shrinking.  All over the world countries are privatizing state-owned enterprises and selling them off.  

We tend to think of New Zealand as a super-socialist state, but they hired some American economists and completely privatized their electric system.  Criticism of the welfare state is happening all over the world.  England has done something about reducing the size of the welfare state by reducing the transfer called aid to the poor. Aid to the poor is something we have always had.  Leibergot studied the period from the 1830s to 1960, found the people on relief got about the same share of the average income during this period.  As we became wealthier, we raised the aid to the poor.  It was however, more difficult to get on relief in those days than now.  The administrators were good at sizing up an applicant’s prospects for getting a job.  The share to the poor is not much different from before, just done differently.  Having it done locally was distinctly better.   

These changes seem to turn on the change in the intellectual climate of opinion.  I have to say I don’t know why.  There is, of course, the  fall of Russia and an another event which may be very important is the death of Mao Tse Tung.  Mao is outstanding for the number of people he killed.  As a percentage of population, Cambodia had more deaths, but they were a much smaller country.  If they had killed every person in Cambodia, Mao would still have won.   

Mao died and was replaced by a man who said “all cats catch mice regardless of their color.”  He began moving China toward an open economy.  The climate of opinion has changed, but there have been few changes about how we do things.  On my recent visit to China I found conditions much better than when I was there some fifty years ago.  India which for many years was under the control of the Congress Party was a very interventionist state.  It was not a socialist state, but had a large number of regulations that made it impossible for them to develop.  That is still true, but the new government is more favorable toward open markets.   

In the United States the climate of opinion has changed, but there has not been very much change  in the way we do things.  The social security system is actually becoming worse.  Unlike England, the United States does not have much in the way of state owned industry.  The US Postal Service is probably the largest industry run by the government, but under competition from private delivery companies, this is slipping away.  The Tennessee Valley Authority still exists and the military arsenals are owned by the government, but run often run privately.  We are not cutting back on government expenditure very much.  Cutting back is very difficult because we are prisoners to Prince Bismark.  Most of the payments by government are to social security programs. 

The total weight of Prince Bismarck's work has now become so heavy that many countries are having fiscal difficulties.  Radical changes are at least freely discussed and in England they have even been implemented on a small-scale.  All this deals with the real world and not intellectuals.  Since about 1890 or the fall of Russia the free market has been getting a much better treatment from intellectuals than before.  You find people saying that democracy is a good form government because it leads to open markets and low tariffs.  I've only seen this argument a few times, but before 1990 not at all.  It is of course a false argument since  democracies expanded government and now seem unable to do much about reducing it.  It is true that tariffs have fallen although it can be argued that this is in spite of rather than because of democracy.   

But to offer an explanation which the non-economists here may not like, I suspect the fact that almost all economics classes in United States and Europe have argued for lower tariffs almost since Ricardo may be the reason for the fall.  Altogether in my opinion these are great improvements in intellectual currents since 1990. 

I hope these improvements will continue but I don't think we should rely on this hope.  It requires hard work in the heels of intellectual controversy and the Philadelphia society of courses is a leader in bringing out these questions.