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A reply to George Stigler: evaluating government policy.

MY REMARKS TONIGHT were provoked by reading another Adam Smith lecture, one presented by George Stigler to the National Association of Business Economists in New Orleans in October 1987.(1) As is usually the case, Stigler's lecture was pointed, humorous, and outrageous. My first reaction was that Stigler was pulling our collective leg. On second reading, I decided that he was serious but dangerously wrong. Because I am cautious about criticizing a distinguished economist who is a Nobel laureate and a friend of free markets, I ask you to think through this issue with me.

The general thesis of Stigler's lecture is that, given the available information, every government decision should be regarded as correct. Mistakes can only be identified after the fact and only if additional information leads to a reversal of the initial decision. By this standard, for example, slavery and prohibition must be regarded as correct policies at the time and can now be judged as mistakes only because these policies have since been repealed. According to Stigler, there is no basis for concluding that any current policy is a mistake, however offensive to any of us. (I warned you that these remarks were outrageous.)

Stigler defends this position on the basis of what he describes as "the principle of legitimacy". He reasons, with considerable merit, that any government decision based on its legitimate authority must be regarded as correct, even if many of us do not prefer the outcomes of a specific decision. Let me use two examples to make his point:

1. A group of people all agree to participate in a lottery with known rules and a known distribution of outcomes. A decision to participate in this lottery implies that each person prefers the expected outcomes comes of this lottery to conditions in which this lottery is not provided. In any specific "draw" of this lottery, however, there will be some winners and some losers. In this case, given that the rules of the lottery have not been changed without their knowledge and consent, the losers in a specific draw have no basis for asserting that the specific draw was unfair or incorrect.

2. A group of people agree to form a club to provide some service and agree on the rule for subsequent decisions by this club. Every member of the club, by joining the club and agreeing to the rules, must expect to benefit from the set of decisions by the club. A member who does not prefer the outcomes of some specific decision, however, has no basis for complaint if this decision is made by the rules to which he had agreed.

In this defined context, Stigler is correct, and he has made an important point.

Nevertheless, I still have three serious reservations about Stigler's concession.

First, the effective constitution of the U.S. Government has been substantially changed by extra-constitutional processes. In this sense, many of the current decisions of the government are not legitimate, in that the rules have been changed without our consent.(2) Only a partial listing of the changes in the effective economic constitution is sufficient to make this point.

1. The few spending powers enumerated in Article 1, Section 8, were expanded without limit by a 1936 ruling of the Supreme Court that "the power of Congress to authorize appropriations of public money for public purposes is not limited by the direct grants of legislature power found in Constitution." This obscure decision provides the only constitutional authority for the federal part of the contemporary welfare state. One can state with assurance that the original Constitution would not have been ratified if this later interpretation had been anticipated.

2. The constitutional rule that "all duties, imposts, and excises be uniform throughout the United States" has been interpreted to permit a differential "windfall profits" tax on oil and the complex web of internal tariffs that is implicit in environmental legislation.

3. The power "to coin Money" has been broadened to permit a federal monopoly of paper money.

4. The power "to regulate commerce among the several States" has been progressively broadened to permit federal regulation of any form of commerce within individual states.

5. The rule that "No state shall pass any law impairing the obligations of contract" has been interpreted to permit several types of contractual impairments, including price and wage controls, rent controls, and debt moratoria.

6. The "public use" test for the exercise of eminent domain has been expended to a "public purpose" test to permit the use of eminent domain for urban renewal and other land redistribution among private parties.

7. The "just compensation" test for the exercise of eminent domain has been restricted, until recently, to preclude compensation for regulations that substantially reduce, but do not eliminate, the value of property to the private owners.

And so on.

In these cases, the language of the formal Constitution is clear and specific. The effective economic constitution, however, has been changed substantially in response to political pressure, and these changes have been ratified, not by formal amendment, but by creative and compliant decisions of the Supreme Court. There is a reasonable case that some of the changes in the effective economic constitution have been appropriate. My primary point is that these changes in the effective constitution were made by extra-constitutional procedures, by compliant courts, rather than by the Article V procedures, for formal amendments that would have provided a test whether these changes were supported by a broad consensus. Consistent with the Stigler perspective, but not with his conclusion, many current activities of the government are wrong because they are not legitimate.

My second reservation about Stigler's conclusion is that legitimacy is not the only standard by which government action should be judged. Let me use the following example to illustrate this point:

A power plant emits some pollution that affects a broadly diffused population, and this activity is legal. Each person in the affected population would be willing to pay $10 a year to reduce this pollution by one unit and the cost to the power plant of reducing pollution by this amount is $1 dollar a year per person affected, but the costs of information and transactions are too high for a private contract to resolve this issue. Most people would regard this condition as wrong, even if it is legal. In this case, the level of government regulation is too low.

My general point, however, also applies if the above costs are reversed. In this case, each person in the affected population would be willing to pay $1 a year to reduce the pollution by one unit, and the cost to the power plant of reducing pollution by the amount is $10 per year per person affected. A regulation to reduce pollution in this case should also be regarded as wrong, even if the government has the full authority for such regulation.

For Stigler, however, these comparisons are irrelevant, as long as the government has the authority to use regulations to redistribute income, in either direction between the owners of the power plant and the population affected by pollution.

As an economist, I may be professionally compulsive about this issue, but I suggest that it also is appropriate to judge both private and government decisions in terms of their efficiency, whether or not they are legal or legitimate.

The primary basis on which government should be judged, however, is neither legitimacy nor efficiency but rather the consent of the governed. For me, this was recently reinforced by reading the fine new book on the Civil War by James McPherson.(3) Southern politicians defended slavery, among other grounds, on the basis that slaves were better off than those they described as the "wage slaves" in the North. This was surely not correct, but this begs the point; the fundamental nature of slavery is that the slaves were not allowed to make this choice. Governments of all kinds are institutions with the monopoly of the legal authority for coercion. The words "policy" and "police", for example, have the same root. The primary difference among governments is not their legitimacy, but the scope of their authority and whether the rules by which this coercion is exercised reflect the prior consent of those subject to these rules. The distinctive American contribution was to assert the supremacy of individual rights over governmental powers and to state, in our Declaration of Independence, "that to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed." One wonders how those who risked their lives, property, and scared honor to sign this Declaration would judge the extensive powers of the modern state.

In summary, I suggest, there are three standards for concluding that many of the decisions of government are not correct:

1. Some decisions are not legitimate, in that the rules by which such decisions are made were not approved by constitutional processes.

2. Some decisions are not efficient, in that a different exercise of legitimate powers could achieve the same ends at lower cost.

3. Some decisions involve an unnecessary restraint on individual liberty, in that a different structure of government would command a broader consent.

The implications of this perspective are much richer than those suggested by George Stigler. We need to restore a constitutional perspective most importantly on the processes for constitutional change. A continuing important role exists for economists and other policy analysts to document the inefficiency of current policies and to suggest more efficient alternatives. We need to review the structure of government to determine whether some different structure would command broader consent.

My own view, with Adam Smith, is that "Little else is requisite to carry a state from the lowest barbarism to the highest opulence but peace, easy taxes, and a tolerable administration of justice." Some of you may believe that the state should do more, and a civilized debate on the appropriate role of the state can be valuable. We may not agree on this issue. Somehow, someday, however, we must find a way to agree on the rules by which this issue is resolved.


(1) George Stigler "The Adam Smith Lecture" The Effect of Government on Economic Efficiency," Business Economics, Vol. 23, No. 1, January 1988.

(2) William A. Niskanen, "The Erosion of the Economic Constitution" in James D. Gwartney and Richard E. Wagner (eds), Public Choice and Constitutional Economics, (Greenwich, Conn.: JAI Press, 1988).

(3) James McPherson, Battle Cry of Freedom: The Civil War Era, (New York: Oxford University Press, 1988).


Dr. Niskanen makes two basic complaints against my "principle of legitimacy," which states that actions of the government of the state are by definition the authoritative statement of the nation's views.

The first complaint is that many of the state's actions are not in keeping with the letter or original intent of the U.S. Constitution. Here Niskanen quarrels with the accepted view of constitutional law, which allows interpretation and adaptation to new circumstances of the written constitution. A dispute between two economist on the nature of constitutional law cannot be productive. Note that this complaint would not arise when discussing nations such as Great Britain that have no written constitutions.

The second complaint is that the state does all too many things that he finds inefficient or obnoxious. Nothing I said was intended to deprive anyone of the right to criticize or to attempt to change governmental policies.

Dr. Niskanen, on my view, has seized an opportunity to criticize a variety of governmental policies. Neither Adam Smith nor I would object to this action, especially because both of us would agree with many of his criticisms.
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Title Annotation:includes rejoinder from George Stigler
Author:Niskanen, William A.
Publication:Business Economics
Date:Jan 1, 1989
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