Tullock – A Little History of Markets
Little History of Markets
April 13, 2002
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
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
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 19th
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
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
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
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
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
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
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.