Probing Leviathan

An Investigation of Government in the Economy, George Lermer ed. (Fraser Institute, 1984)
reviewed by Paul Geddes
December 1984

"For by art is created that great leviathan an Artificial Man ... in which sovereignty is an Artificial soul..." Thomas Hobbes, 1651.

Another free market book put out by the Fraser Institute? Yes, this collection of five articles by noted Canadian economists is an attempt to understand the growing role of government in our economy.

The first two articles, by Lipsey and Courchene are defences of the market but only apologetic ones. To quote Lipsey, "To a pragmatist such as myself, who accepts that the market is full of imperfections, its defence is much more difficult than it is to a dogmatist who believes that the free market is perfect and there is no case for any intervention" (p.19). Lipsey remains bound within the constraints of modern welfare economics. This "good" is determined by end goals. That which is desirable is "an optimum allocation of fixed quantities of productive resources in such a manner that further reallocation is impossible without making at least one person worse off". The perfect competition economic model could produce such an optimal solution in a perfect world. However, because of market failures, unbalanced market powers and the existence of information, transaction and enforcement costs in the real world, there is no assuredness that leaving the economy alone could produce the optimal allocation.

Many economists at this point leave the market model altogether. Since the market allocation is not "optimal", why not use some other method to arrive at optimal allocation (i.e. planning). Lipsey's article is an attempt to rescue his profession from this extreme and encourage some respect for the market. After all, in some broad sense the market does move resources in the desired direction. It is decentralized, flexible, leaves scope for personal adaptation and can bring change quickly, and considering the alternatives, it is the best we have.

A libertarian is armed with more powerful arguments than Lipsey's "end goal" defense of the market. To us the market is nothing more than the coming together of millions of decisions of individuals. People have millions of decisions of individuals. People have millions of goals and are not "means" to some optimal allocation of resources. Liberty itself is individuals having liberty to pursue their own goals.

The next two articles in Probing Leviathan by Grubel and Howard & Stanbury are more concerned with measuring the state in the economy. Grubel attempts to measure the cost of Canada's social insurance programs, using the concept of "moral hazard" that he introduced to the Libertarian Supper Club last December. If you want to find out the breadth of government attempts to redistribute income in Canada, start by examining the tables in Grubel's article.

The Howard & Stanbury article (including their appendix) is the most comprehensive in the book. They separate government's effect on the economy into "instruments" or tools that the government uses. Some of the major instruments are:

a) Expenditures (total government expenditure in 1982 amounted to around 45% of total spending in the economy).

b) Public employment (the public sector employs around a quarter of all employed persons in Canada).

c) Tax expenditures (in addition to tax revenues collected by government, citizens were allowed deductions equivalent to another 56% of federal revenues collected if they would spend this amount in an approved manner, i.e. RRSPs, RHOSPs, MURBs, etc.).

d) Regulation (much more difficult to measure. A table on p.154 shows the scale of regulation in Canada. Some categories include: prices; supply; rate of return; disclosure of information; method of production; conditions of service, etc.).

e) Crown Corporations (there were at least 233 provincial crown corporations and at least 464 federal ones in 1982).

f) Loans and guarantees (the value of federal and provincial loans, investments, and guarantees amounted to 18.5% of the GNP in 1980, an indirect annual subsidy worth almost $1 billion to private business in Canada).

g) Equity interest (market power of the Alberta Heritage Fund or Caisse de Depot).

The facts are incontestable. By whatever measure you choose, government is big! The state controls a large and growing portion of our economy. Will the growth continue?

Here all five economists have some optimistic things to say. Although all admit that there are still trends for greater interference, also noted are: public opinion polls which show a growing skepticism about government and its processes; the popularity of less visible government intervention (i.e. loan guarantees rather than direct takeovers) because governments no longer wish to "seem" to grow; and most of all, growth of the underground economy.

The fifth article, by Mirus is an attempt to measure this new Canadian growth phenomenon. Statistics Canada may fail to measure as much as an additional 15% of GNP worth of annual economic activity.

The book provides a useful framework for quantifying the extent of government interference in the economy. The theoretical articles do not compare favorably with more persuasive works such as Hazlitt's Economics in One Lesson (Harper & Row, New York, 1946).

More major criticisms are: 1) an inadequate conception of social good and 2) no clear definition of government. Because social good is not defined, the authors' criticisms and final acceptance of the market are based on some inarticulated subjective concept of "fairness". Howard & Stanbury are even worse. They abdicate all judgement concluding by saying that the ultimate value judgements are for individuals to make. True, but what standard should one choose? Can an economist qua economist say nothing about the proper size of government?

The second weakness is more serious. What is government? Heyne in Chapter 14 of his Economic Way of Thinking (SRA, Chicago, 3rd ed., 1983) describes government as that institution with the "generally conceded and exclusive right to use coercion." Why do we ask this institution to run an airline, broadcasting company or a string of gas stations in Canada? What are the consequences of this? A libertarian recognizes every government action as an insertion of coercion into the affairs of men. When can this be justified? Probing Leviathan doesn't even try to answer.

All in all, the book is worthwhile. It does establish a procedure for measuring the extent of government in our economy. It will provide you with lots of ammunition for discussions with socialists who claim also to fear big government and with conservatives that believe that government only needs to be run by better people (instead of being drastically reduced).