Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
72
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3.1. The Impact of the Industrial Revolution and Reactions to It 73
A great deal of the talk about laissez-faire must be discounted, or at least put into
its proper context. In many cases the arguments concealed an admission that a
problem was insoluble . . . the policy of laissez-faire was not the result of a new and
optimistic belief in the progress of society through private enterprise. It was rather
an acknowledgement that the fund of skill and experience at the service of society
was limited.
A similar attitude was echoed by Keynes (1926, p. 12) when he wrote that
the ineptitude of public administrators strongly prejudiced the practical
man in favor of laissez-faire. . . . Almost everything which the State did in
the eighteenth century in excess of its minimum functions was, or seemed,
injurious or unsuccessful.
However, although the older generation of economists and writers on
public matters . . . were suspicious of state interference, they recognized the
limits of private action, and the need for equality of opportunity, if compe-
tition were to be fair between individuals (Woodward, 1962, p. 445).
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74 Forces That Changed the Role of the State
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3.1. The Impact of the Industrial Revolution and Reactions to It 75
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76 Forces That Changed the Role of the State
momentum, in part promoted by the writings of John Stuart Mill, who died
in 1873, and other writers. Mills views on the role of the state are described in
book 5 of his Principles of Political Economy. They are still worth reading. He
made an important distinction between the necessary and the optional
functions of government. Mill embraced the philosophy of utilitarianism,
according to which happiness is the result of the actions of individuals. It
should be noted that the focus was on happiness and not on the income
level. Actions should be judged by the impact that they have on happiness.
Like Wagner, he advocated a better distribution of wealth (not income)
through the use of direct (but not progressive) taxation and especially of
inheritance and gift taxes, which could be progressive, by reducing the
possibility that the children of the rich would automatically continue to be
rich, thereby making the equality of opportunities more difficult to achieve.
He supported universal suffrage and the promotion of social legislation
enforced by an effective public bureaucracy. These policies did not necessarily
involve more public spending. They were aimed at changing social relations
in society rather than necessarily at promoting a greater spending role by
the state (Mill, 1859).
In Italy, Pope Leo XIII reacted to the growing popularity of socialism and
to the ongoing intellectual debate with an encyclical, the Rerum Novarum of
May 15, 1891, which listed, among the duties of governments, the defense
of private property, the protection of workers in their work against those
who exploited them, a just wage, and a campaign to educate workers to
save.2 Thus, the desired role of the state was changing more rapidly than
assessed by the increase in public spending, which was also changing but
more slowly. The pope did not explicitly support a large government role
through higher public spending, though he hinted at some government role
in social protection.
Wagners writings became popular with those who represented the Italian
national government at that time. They accepted the inevitability of the
growth of public spending, to deal with the growing complexity of the
economy. It has been claimed that Cavour, the first Italian prime minister
after the Italian unification, had even anticipated it and that, once a formal
statement of that law became available, it was widely accepted by students
and practitioners of public finance in both Italy and in other countries. The
growing intervention by the state in economic affairs was opposed by those
who had a more liberalist view of the economy, such as the two leading
Italian economists at the time, Vilfredo Pareto and Maffeo Pantaleoni, and,
at the political level, by Silvio Spaventa, a major political figure (De Cecco
and Pedone, 1995, p. 257).
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3.1. The Impact of the Industrial Revolution and Reactions to It 77
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78 Forces That Changed the Role of the State
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3.1. The Impact of the Industrial Revolution and Reactions to It 79
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80 Forces That Changed the Role of the State
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3.2. Private Responses to the Industrial Revolution 81
By 1891 it had a million members. By 1863 there were more than 400
cooperatives in England and the movement had spread to Scotland.
The cooperative movement in France took a more socialist trend. It was
promoted by Pierre Joseph Proudhom and Louis Blanc, who were influenced
by utopistic socialism, some of it of Catholic inspiration (Nitti, 1971).
Ateliers nationaux were public enterprises created, after the 1848 revolution,
to guarantee work to low-class workers. These enterprises were sustained
by the state. In France, both consumption and production cooperatives
became common, and some began providing credit. The theorist of the
cooperative republic was Charles Gide, whose goal was to ban profit from
economic activities. Thus, it was a clearly socialist movement.
In Germany, the cooperative movement spread to credit institutions.
The main driver of this movement was Herman Schulze-Delitzsch. These
credit cooperatives were primarily engaged in providing minicredit. They
started by providing cheap credit to shoemakers and carpenters, because at
that time there were enough shoemakers and carpenters to make the project
viable. By 1850 Schultze-Delitzsch had created the first cooperative bank in
the world. Credit to some members was provided using the deposits of other
members. Obtaining credit required not collateral but the endorsement of a
kind of commission made up of some members that attested to the honesty
of the borrowing member. By 1859 the General Federation of Cooperatives
was created.
In 1840 Friedrich Wilhelm Raiffeisen created in Germany the first
Catholic rural bank. So-called Raiffeisen Banks soon spread in the rural
areas of German-speaking territories. Their objective was to allow agricul-
tural workers to obtain credit at reasonable interest rates to buy cattle, seeds,
and some equipment for their farms. In 1849 Raiffeisen created a kind of
minicredit initiative through the association for the assistance of agricul-
tural workers without means. This initiative required better-to-do citizens
to provide minicredits to the poorest citizens. Thus, minicredit is not as
recent an invention as many believe.
In 1852 Raiffeisen moved to Heddesdorf and focused his effort on low-
income workers. In 1861 he created the first cooperative credit system of
Raiffeisen. This cooperative depended exclusively on mutual assistance. Its
dependence on Christian ethics made it different from popular banks. By
1888 there were 445 such cooperatives, and the concept soon spread to other
countries. By the second half of the 19th century, there were three coop-
erative systems in existence: the English one that focused on cooperation
in consumption; the French one that focused on cooperation in production;
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82 Forces That Changed the Role of the State
and the German one that focused on cooperation in the provision of credit.
The German system spread to Italy, where Catholic rural credit cooperatives
became common. The Cassa di Gambarore, near Venice, was the first such
cooperative in Italy, created on February 26, 1890.
These innovations were in addition to the more highly developed systems
of social protections that were sponsored by religious groups, confraterni-
ties, mutual assistance societies, and similar groups.
In recent years globalization may have added further reasons for public
assistance and, according to some economists, for more public spending
(Rodrik, 1998; and Williamson, 1997). Marx had worried about the impact
of globalization as early as in 1848.10 Whether this additional push for
government intervention should best be exercised through higher public
spending or through other policy instruments, such as regulations that
forced individuals to buy directly from the market protection against the
risks of being unemployed or the risks of old age or invalidity, is not impor-
tant at this point. In either case the role of the state, interpreted broadly,
would have become larger, although the increase in the level of public
spending would depend on how that role was exercised.11
In conclusion, major structural changes in the economy that took place
over the past two centuries created new pressures on governments to widen
their intervention or on society to develop new institutions to deal with
them. Governments responded to these pressures through new legislation
that at times required higher public spending. As the widespread suspicions
about the bad role that the state had played in the past (when state powers
had been used to favor the interests of the aristocrats) started receding,
citizens became more willing to give greater powers to the government.
They also started to demand better services. However, the response by
governments was often delayed. As a consequence, the spending levels that
had prevailed until the early part of the 20th century might be seen as too
low even by individuals who would broadly share Adam Smiths views on
the economic role of the state.12 The question remains as to how much
higher they needed to become.
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3.3. Changes in Intellectual Winds 83
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84 Forces That Changed the Role of the State
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3.4. Impact of Political Developments 85
on the part of the latter. These views seem highly topical in the aftermath of
the 20089 economic crisis.
As to two other examples of this second need for state intervention,
Keynes mentions the coordination on the part of the government of savings
and investment decisions and the need for a considered national policy
about what size of Population . . . is most expedient for the country to have,
paying attention not just to the size but also to the innate quality of its
future members (p. 49).
In the middle of the Great Depression, Keynes wrote and published his
seminal book perhaps the third-most important book in economics ever
written (together with Adam Smiths and Karl Marxs), in terms of its impact
on policy The General Theory of Employment, Interest, and Money (1936).
That book created a completely new role for the government, the role of
trying to stabilize the economy at a full-employment level. This new role for
the state had not existed before, although the use of public works in times
of crisis had occasionally been proposed and used. Although this new role
did not have a direct impact on the level of public spending, it would have
a large indirect impact.
In the years after the publication of The General Theory, an increasing
number of economists came to believe that a higher level of public spending
by itself would make an economy more recession proof. They embraced and
advocated the new stabilization role proposed by Keynes, that the govern-
ments should compensate, with its fiscal action, for lack of private demand
in the economy, a condition that many considered likely, because of a pre-
sumed natural tendency to underconsume or underinvest by individuals.
Because it was always politically easier to increase spending or reduce taxes
than to do the opposite, the Keynesian role inevitably promoted a policy
asymmetry that would inevitably lead to higher public spending over the
long run.17 However, in spite of current perceptions, Keynes did not have a
direct involvement in promoting large increases in spending. He may have
been the least Keynesian among the Keynesians.
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86 Forces That Changed the Role of the State
extent, fascist ideologies created pressures for a larger role of the state in the
economy. Socialists or communists ideologies pushed for an overwhelming
economic role for the state in both the allocation of national resources and
the distribution of national income. These experiments, and especially the
one going on in Russia in the decades after the 1917 Bolshevik Revolu-
tion, attracted a large following among Western intellectuals, especially but
not only in European countries. Various intellectuals saw virtues in that
experiment but tended to ignore defects.18 They in turn pressured the gov-
ernments of democratic and market-oriented countries, including those of
the United States, the United Kingdom, France, Canada, and Australia to
increase public spending.
The governments of these countries were put on the defensive and often
responded by creating new social programs or by expanding existing ones,
giving rise to a mixed economy, a concept that became particularly pop-
ular in the 1950s and 1960s. The Great Depression, an event that was seen
by many as a massive failure of market economies, gave a further impe-
tus to these policies. In the United States, the New Deal, which included
the introduction of social security for the whole working population
and the regulation of the financial markets, aimed at correcting the pre-
sumed failures in the market economy and at increasing the role of the
state in sustaining and redistributing incomes. The move toward mixed
economies or even, in some countries, toward mature welfare states was
set in motion. Over the next two generations, these changes would bring a
dramatic expansion in public spending in many countries.
The economic role of the state in a market economy that had prevailed
until the Great Depression would change dramatically between the 1920s, a
decade that can be seen as representing the end of laissez-faire as pursued by
countries, and the 1940s or 1950s, which can be seen as the beginning of an
era of mixed economies and welfare states. Some would argue that the end
of laissez-faire had come much earlier, perhaps as early as 1890. The change
in public spending between the 1920s and the 1950s was gradual in most
countries but less so in the United States, where the share of total public
expenditure in GNP rose sharply from 9.9 in 1929 to 28.4 in 1958.19 It would
then accelerate in many countries over the next two decades but much less in
the United States, where a conservative Republican administration would
slow down that growth in the decade of the 1950s and resistance to tax
increases made higher public spending more difficult in later years. This
acceleration would require new policies and new legislation.
In 1959 Richard Musgrave systematized the new thinking in his influential
book, The Theory of Public Finance (l959). It identified the three separate
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3.4. Impact of Political Developments 87
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88 Forces That Changed the Role of the State
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3.5. Main Conclusions 89
them very expensive. A larger level of public spending was also believed to
contribute to economic stabilization, at a time when the Great Depression
was still in many peoples mind.24 Countries with higher levels of public
spending were thought to be less exposed to and thus more protected against
recessions.
We shall have to wait to see whether the crisis of 20089 affected countries
with high levels of public spending less than those with low levels.25 Over
the years, a lack of symmetry in stabilization policies has contributed to
increasing the shares of public spending in gross domestic product. Increases
in spending, enacted during slowdown or recessionary periods, were not
neutralized by reductions in spending during periods of recovery. Thus, the
pursuit of active stabilization policies contributed over the years to increases
in the level of public spending. Once again, it will be interesting to observe
whether the share of public spending in GDP, which was increased during
the current crisis, will soon revert to the level that had existed in the years
before the crisis.
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90 Forces That Changed the Role of the State
urbanization; changing views on the role that the state should play on eco-
nomic questions; the impact of major economists, especially Adam Smith,
Karl Marx, and John Maynard Keynes; and the competition that came from
the Russian experiment.
The growing intervention by the state crowded out alternative, sponta-
neous ways of coping with the forces unleashed by these factors. However,
the state was not a passive policy instrument. It was often an active player
that promoted the interests of those who controlled it or benefited from its
policies.
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