Copyright the Fraser Institute www.fraserinstitute.org Copyright the Fraser Institute www.fraserinstitute.org Copyright the Fraser Institute www.fraserinstitute.org Probing Leviathan An Investigation of Government in the Economy Edited by: George Lermer Contributors: Thomas J. Courchene Herbert Grubel John L. Howard Richard G. Lipsey Rolf Mirus W T. Stanbury Copyright the Fraser Institute www.fraserinstitute.org Papers appearing in this volume were first presented at a conference sponsored by The School of Management, The University of Leth­ bridge, Lethbridge, Alberta, April 1 and 2, 1982. The School of Man­ agement gratefully acknowledges the financial support of the Burns Foods Endowment Fund. Canadian Cataloguing in Publication Data Main entry under title: Probing Leviathan Includes index. 1. Canada - Economic policy - 1971- 2. Canada - Economic condi­ tions - 1971- 3. Government spending policy - Canada. I. Lermer, George. II. Fraser Institute (Vancouver, B.C.) HC115.P762 1984 330.971 C84-091416-4 COPYRIGHT © 1984 by The Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written per­ mission except in the case of brief quotations embodied in critical articles and reviews. Printed in Canada. Copyright the Fraser Institute www.fraserinstitute.org CONTENTS FOREWORD, Michael A. Walker Vll PREFACE GOVERNMENT AND THE MARKET ECONOMY, George Lermer IX PART I Chapter 1 CAN THE MARKET ECONOMY SURVIVE? Richard G. Lipsey 3 I. What the Market Economy Does 3 II. The Case for the Market Economy 9 III. The Case for Intervention 13 IV. The Erosion of the Free Market 19 V. The Future of the Market Economy 28 Notes 35 References 36 Chapter 2 THE CITIZEN AND THE STATE: A MARKET PERSPECTIVE, Thomas J. Courchene 39 I. Introduction 39 II. The Protected Society 41 The drive for economic security and the interaction between citizen and the state 42 Protectionism and the realities of the 1980s 46 Federalism and the market system 49 III. Conclusion 53 Notes 54 References 55 PART II Chapter 3 THE COSTS OF CANADA'S SOCIAL INSURANCE PROGRAMS, Herbert Grubel 59 I. Introduction 59 II. Rationale for Public Insurance 62 III. Some Facts About Welfare Spending 65 IV. Moral Hazard 72 Copyright the Fraser Institute www.fraserinstitute.org V. Costs Through Changes in the Nature of Society and High Taxes 79 VI. Policy Conclusions 83 VII. Recommendations 83 Notes 84 References 85 Chapter 4 MEASURING LEVIATHAN: THE SIZE, SCOPE AND GROWTH OF GOVERNMENTS IN CANADA, John L. Howard and W. T. Stanbury 87 I. Increasing Concern About the Role of Government 88 II. Summary of the Main Findings 91 III. Understanding Leviathan: Conclusions and Implications 94 Notes 106 References 108 Chapter 5 THE INVISIBLE ECONOMY: ITS DIMENSIONS AND IMPLICATIONS, Rolf Mirus 113 I. Introduction 113 II. Unobserved Economic Activity-An Attempt at Classification 114 III. Measurement of the Invisible Economy 116 IV. Causes of the Invisible Economy 122 V. Implications and Policy Options 123 Notes 125 Bibliography 126 Appendix to Measuring Leviathan: The Size, Scope and Growth of Governments in Canada, John L. Howard and W. T. Stanbury 127 I. Expenditures 128 II. Public Employment 141 III. Tax Expenditures 144 IV. Regulation 152 V. Public Enterprises/Crown Corporations 160 VI. Loans and Loan Guarantees 174 VII. Mixed Enterprises: Equity Ownership in Private Sector Firms 181 VIII. Chosen Instruments 188 IX. Suasion 193 Notes 199 References 213 Copyright the Fraser Institute www.fraserinstitute.org FOREWORD Seldom in recent history has the role of government been more in question than at the present time. Mushrooming deficits have fo­ cused public attention on the spending and taxing of governments and caused widespread concern. The increasingly obvious burdens associated with government regulations have caused a reconsider­ ation of their role in furthering the public interest. As well, there is growing recognition that the same human motives which have lead some to be cynical about the operation of the marketplace also operate in the public sector. The purpose of this book is to probe different aspects of the government sector from a behavioural and quantitative point of view. The Institute is pleased to be able to publish the results of the enquiry, ably edited by Professor George Lermer. However, owing to the independence of the authors the views expressed by them do not necessarily reflect the views of the members, trustees, or funding agencies of The Fraser Institute. Michael A. Walker Director The Fraser Institute Copyright the Fraser Institute www.fraserinstitute.org GEORGE LERMER George Lermer is Professor, Director of the School of Management, and Acting Dean, Faculty of Professional Studies, the University of Lethbridge. He was awarded a B.Sc. by the Massachusetts Institute of Technology, and an M.A. and Ph.D. in economics by McGill Univer­ sity. He furthered his studies by spending one year at the Wharton School, University of Pennsylvania and another at the London School of Economics. After twelve years of teaching at the University of British Colum­ bia, Concordia University and the University of Waterloo, Professor Lermer joined the staff of the Economic Council of Canada. There he contributed to the Council's study, "Efficiency and Regulation" which dealt with Canada's banks and other desposit taking financial insti­ tutions. In 1976, Professor Lermer became Director, Resources Branch, Consumer and Corporate Affairs Canada, where he was responsible for pursuing a number of major investigations and research studies into Canadian resource industries, including a detailed analysis of per­ formance in the Canadian agriculture and food processing industries. The joint author of a book on Canadian money and banking, Pro­ fessor Lermer has also published articles in economic theory, the ra­ tionalizing of Canadian industry, the Canadian tariff structure, the efficiency of banks, and most recently, on regulation of industry. He served on the editorial board of the Canadian Journal of Economics. Professor Lermer has consulted for a number of government agen­ cies and private trade organizations, and has written studies on the Canadian machinery manufacturing industry and the socio-economic problems of communities suffering the loss of a major industry. Copyright the Fraser Institute www.fraserinstitute.org PREFACE GOVERNMENT AND THE MARKET ECONOMY Authority over economic decisions is rapidly being transferred from the private to the public sector. The conference, for which the papers in this volume were originally prepared, examined the speed and con­ sequences of this transfer. The conference's objective, like this book's, was to acquaint a non-professional audience with a wide range of pro­ fessional opinion and empirical findings about the decline of the market sector as an allocator of resources and about the prospects for the mixed economy. The conference addressed such questions as why government grows, why there is dissatisfaction with large government, and where the growth of government is likely to take us. Growth of government intervention During the post-war years, many professional economists, like a ma­ jority of academics, supported an expanded role for governments. Some argued from a strong commitment to Keynesian ideas about how government should manage an apparently unstable market econ­ omy. Their views were particularly influenced by the still vivid memories of the pre-war depression. Others argued for government intervention in order to deal with a feared secular stagnation of de­ mand in rich economies, and the alleged under supply of public goods like public transport, parks, and security. More recently, in response to growing criticism of the market's performance, government has undertaken to allocate those resources for which property rights are ill-defined or unenforceable, such as the right to harvest a fishing Copyright the Fraser Institute www.fraserinstitute.org x Preface ground or to enjoy a pollution free environment. The predilection of intellectuals towards a benevolent and rationally planned allocation of resources under government auspices is well known. George Stigler, 1 for instance, commented that, "The intellec­ tual has never felt kindly towards the market place: to him it has always been a place of vulgar men and base motives." Indeed, Stigler'S motive for writing was, "To persuade young intellectuals that they should re-examine the traditional hostility towards private enterprise." All the authors represented in this volume share Stigler's objective. Their concerns include not only the rapid expansion of government in­ fluence over the economy, but also the growing threat to the viability of the market sector of the mixed economy, and to our economic and social freedoms, posed by the concentration of economic power in the political arena. They remain pessimistic about the future for the Western democracies, discerning trends towards further expansion of the government sector. Nonetheless, all the essays end on one op­ timistic note, namely that the intellectual community at least can be persuaded to accept the arguments why government intervention so often fails to deliver on its promise, whereas the free market so often succeeds. All the authors remain optimistic that reason will prevail over the twin evils of centralization and politicization of economic life. The essays provide not only a clear analysis of how government in­ tervention has spread as it has, but also a clarion call to resist the growing role of government. They are reminiscent of the pessimism expressed by the late Professor Joseph Schumpeter,2 who viewed capitalism as a condemned social system. For Schumpeter, this great engine of progress would inevitably be derailed by the intellectual's implacable hostility to capitalism, a hostility aggravated by the grow­ ing number of intellectuals, spawned by capitalism's success, who would share the intellectual's traditional anti-capitalist and anti­ market bias. The authors share Milton Friedman's3 belief that, "we shall be able to preserve and extend freedom ... despite the economic powers already concentrated in Washington" (government).