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10 - THE NEED FOR GOVERNMENT

Arye L. Hillman
Arye L. Hillman
Affiliation:
Bar-Ilan University, Israel
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Summary

This final chapter is about the need for government. In section 1, we consider the growth of government from the time of Adam Smith and ask whether the growth of government has been consistently socially beneficial. In section 2, we investigate the role in a society of trust, also known as social capital. We conclude in section 3 with an overview of why economists' views on the need for government can differ.

Growth of Government and the Need for Government

A measure of the size of government is by fiscal criteria of taxation and public spending. Measurement of the size of government includes, however, also regulation by governments of economic activity and ownership of firms by governments. Hence, the scope of taxation and public spending, or public finance, is only a partial measure of the size of government. We include public policy as an indication of involvement of government when we consider resolution of externality problems and the seeking of paternalistic objectives through regulation and when we consider, for example, the role of international trade policy in social insurance and income redistribution.

How and why did government grow?

The questions of how and why government grew take us to economic history. A course in economic history provides a comprehensive background for answering our questions. We shall make do with a more limited perspective.

Table 10.1 shows social spending by government from the time of publication of Adam Smith's Wealth of Nations in 1776 up to the mid-19th century.

Type
Chapter
Information
Public Finance and Public Policy
Responsibilities and Limitations of Government
 , pp. 739 - 786
Publisher: Cambridge University Press
Print publication year: 2009

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References

Congleton, R. D., 2001. On the durability of king and council: The continuum between dictatorship and democracy. Constitutional Political Economy 12:193–215.CrossRefGoogle Scholar
Congleton, R. D, 2007. From royal to parliamentary rule without revolution: The economics of constitutional exchange within divided governments. European Journal of Political Economy 23:261–84.CrossRefGoogle Scholar
Hochschild, A., 1998. King Leopard's Ghost. Pan Macmillan, London.Google Scholar
Lindert, P. H., 2004. Growing Public: Social Spending and Economic Growth since the Eighteenth Century. Cambridge University Press, Cambridge U.K.Google Scholar
Tanzi, V., and Schuknecht, L., 2000. Public Spending in the 20th Century. Cambridge University Press, New York.CrossRefGoogle Scholar
North, D. C., 1985. The growth of government in the United States: An economic historian's perspective. Journal of Public Economics 28:383–99.CrossRefGoogle Scholar
Wagner's law appeared in Wagner (1893); see also Wagner (1958).
Wagner, A., 1893. Grunglegung der Politischen Oekonomie (3rd Edition). C. F. Winter, Leipzig.Google Scholar
Wagner, A., 1958 (reprinted). Three extracts on public finance. In Musgrave, R. A. and Peacock, R. (Eds.), Classics in the Theory of Public Finance. Macmillan, London, pp. 1–16.Google Scholar
Demsetz, H., 1982. The growth of government. In Economic, Legal, and Political Dimensions of Competition. North-Holland, Amsterdam, pp. 99–125.Google Scholar
Peltzman, S., 1980. The growth of government. Journal of Law and Economics 23:209–87.CrossRefGoogle Scholar
Gemmell, N., 1990. Public employees' preferences and the size of the public sector. Journal of Economic Behavior and Organization 14:393–402.CrossRefGoogle Scholar
Kau, J. B., and Rubin, P. H., 2002. The growth of government: Sources and limits. Public Choice 113:389–402.CrossRefGoogle Scholar
Sanz, I., and Velázquez, F. J., 2007. The role of ageing in the growth of government and social welfare spending in the OECD. European Journal of Political Economy 23:917–31.CrossRefGoogle Scholar
Brennan, G., and Buchanan, J. M., 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge University Press, Cambridge U.K.Google Scholar
Tridimas, G., and Winer, S. L., 2005. The political economy of government size. European Journal of Political Economy 21:643–66.CrossRefGoogle Scholar
Brander, J. A., and Spencer, B., 1994. Trade adjustment assistance: Welfare and incentive effects of payments to displaced workers. Journal of International Economics 36:239–61.CrossRefGoogle Scholar
Cassing, J. H., 1980. Alternatives to protectionism. In Leveson, I. and Wheeler, J. W. (Eds.), Western Economies in Transition: Structural Change and Adjustment Policies in Industrial Countries. Westview Press, Boulder CO, pp. 391–424.Google Scholar
Cassing, J. H., Hillman, A. L., and Long, N. V., 1986. Risk aversion, terms of trade variability, and social consensus trade policy. Oxford Economic Papers 38:234–42.CrossRefGoogle Scholar
Ethier, W. J., 2004. Political externalities, nondiscrimination and a multilateral world. Review of International Economics 12:303–20. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), 2008. The Political Economy of International Trade Policy and the World Trade Organization. Edward Elgar, Cheltenham U.K., pp. 370–87.Google Scholar
Feeney, J., and Hillman, A. L., 2004. Trade liberalization through asset markets. Journal of International Economics 64:151–67. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), 2008. The Political Economy of International Trade Policy and the World Trade Organization. Edward Elgar, Cheltenham U.K., pp. 173–89.Google Scholar
Hillman, A. L., and Moser, P., 1996. Trade liberalization as politically optimal exchange of market access. In Canzoneri, M., Ethier, W. J., and Grilli, V. (Eds.), The New Transatlantic Economy, Cambridge University Press, New York, pp. 295–312. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), The WTO and the Political Economy of Trade Policy, Edward Elgar, Cheltenham UK, 2008, pp. 290–307.Google Scholar
Schonhardt-Bailey, C., 1991. Specific factors, capital markets, portfolio diversification, and free trade: Determinants of repeal of the Corn Laws. World Politics 43:545–69.CrossRefGoogle Scholar
Garen, J., and Trask, K., 2005. Do more open economies have bigger governments?: Another look. Journal of Development Economics 77:533–51.CrossRefGoogle Scholar
Rodrik, R., 1998. Why do more open economies have bigger governments?Journal of Political Economy 106:997–1032.CrossRefGoogle Scholar
Grossman, H. I., 2002. Make us a king: Anarchy, predation, and the state. European Journal of Political Economy 18:31–46.CrossRefGoogle Scholar
Hobbes, T., 1651/1962. Leviathan (or the Matter, Forme and Power of a Commonwealth Ecclesiastical and Civil). Collier Books, New York.Google Scholar
Locke, J., 1960/1690. Two Treatises of Government. Lazlett, P. (Ed.), Cambridge University Press, Cambridge U.K.Google Scholar
Rowley, C. K., 2001. Constitutional political economy and civil society. In Mudambi, R., Navarra, P., and Sobbrio, G. (Eds.), Rules and Reason: Perspectives on Constitutional Political Economy, Cambridge University Press, New York, pp. 69–96.CrossRefGoogle Scholar
Buchanan, J. M., 1975. The Limits of Liberty: Between Anarchy and Leviathan. University of Chicago Press, Chicago IL.Google Scholar
Buchanan, J. M., 1994. Lagged implementation as an element in constitutional strategy. European Journal of Political Economy 10:11–26.CrossRefGoogle Scholar
Brennan, G., and Buchanan, J. M., 1985. The Reason of Rules. Cambridge University Press, Cambridge U.K.Google Scholar
Elster, J. 1984. Ulysses and the Sirens. Cambridge University Press, Cambridge U.K.Google Scholar
Axelrod, R., 1984. The Evolution of Cooperation. Basic Books, New York.Google Scholar
Fehr, E., and Gächter, S., 2000. Fairness and retaliation: The economics of reciprocity. Journal of Economic Perspectives 14:159–81.CrossRefGoogle Scholar
Kreps, D., Milgrom, P., Roberts, J., and Wilson, R., 1982. Rational cooperation in the finitely repeated prisoners' dilemma. Journal of Economic Theory 27:245–52.CrossRefGoogle Scholar
Shilony, Y., 2000. Diversity and ingenuity in voluntary collective action. European Journal of Political Economy 16:429–43.CrossRefGoogle Scholar
Guttman, J. M., 2000. On the evolutionary stability of preferences for reciprocity. European Journal of Political Economy 16:31–50.CrossRefGoogle Scholar
Guttman, J. M., 2001. Self-enforcing reciprocity norms and intergenerational transfers: Theory and evidence. Journal of Public Economics 81:17–51.CrossRefGoogle Scholar
Brennan, G., and Pettit, P., 2004. The Economy of Esteem: An Essay on Civil and Political Society. Oxford University Press, Oxford.CrossRefGoogle Scholar
Grief, A., 1994. Cultural beliefs and the organization of society: A historical and theoretical reflection on collectivist and individualistic societies. Journal of Political Economy 102:912–50.CrossRefGoogle Scholar
Rapoport, H., and Weiss, A., 2003. The optimal size for a minority. Journal of Economic Behavior and Organization 52:27–45.CrossRefGoogle Scholar
Berg, J., Dickhaut, J., and McCabe, K., 1995. Trust, reciprocity, and social history. Games and Economic Behavior 10:122–42.CrossRefGoogle Scholar
Croson, R., and Buchan, N., 1999. Gender and culture: International experimental evidence from trust games. American Economic Review 89:386–92.CrossRefGoogle Scholar
Knack, S., and Keefer, P., 1997. Does social capital have an economic payoff? A cross-country investigation. Quarterly Journal of Economics 112:1251–88.CrossRefGoogle Scholar
Putnam, R. D., 2000. Bowling Alone: The Collapse and Revival of American Community. Simon & Schuster, New York.CrossRefGoogle Scholar
Easterlin, R. A., 1974. Does economic growth improve the human lot? Some empirical evidence. In David, P. A. and Reder, M. W. (Eds.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. Academic Press, New York, pp. 89–125.Google Scholar
Easterlin, R. A., 2002. Happiness in Economics. Edward Elgar, Cheltenham U.K.Google Scholar
Hillman, A. L., 1998. Political economy and political correctness. Public Choice 96:219–39. Reprinted in Congleton, R. D., Hillman, A. L., and Konrad, K. A., 2008. 40 Years of Research on Rent Seeking 2 – Applications: Rent Seeking in Practice. Springer, Berlin, pp. 791–811.Google Scholar
Musgrave, R., 1959. The Theory of Public Finance. McGraw Hill, New York.Google Scholar
Robbins, L., 1932 (2nd Edition 1935). An Essay on the Nature and Significance of Economic Science. Macmillan, London.Google Scholar
Willis, H. P., 1912. Political obstacles to anti-trust legislation. Journal of Political Economy 20:588–98.CrossRefGoogle Scholar
Congleton, R. D., 2001. On the durability of king and council: The continuum between dictatorship and democracy. Constitutional Political Economy 12:193–215.CrossRefGoogle Scholar
Congleton, R. D, 2007. From royal to parliamentary rule without revolution: The economics of constitutional exchange within divided governments. European Journal of Political Economy 23:261–84.CrossRefGoogle Scholar
Hochschild, A., 1998. King Leopard's Ghost. Pan Macmillan, London.Google Scholar
Lindert, P. H., 2004. Growing Public: Social Spending and Economic Growth since the Eighteenth Century. Cambridge University Press, Cambridge U.K.Google Scholar
Tanzi, V., and Schuknecht, L., 2000. Public Spending in the 20th Century. Cambridge University Press, New York.CrossRefGoogle Scholar
North, D. C., 1985. The growth of government in the United States: An economic historian's perspective. Journal of Public Economics 28:383–99.CrossRefGoogle Scholar
Wagner's law appeared in Wagner (1893); see also Wagner (1958).
Wagner, A., 1893. Grunglegung der Politischen Oekonomie (3rd Edition). C. F. Winter, Leipzig.Google Scholar
Wagner, A., 1958 (reprinted). Three extracts on public finance. In Musgrave, R. A. and Peacock, R. (Eds.), Classics in the Theory of Public Finance. Macmillan, London, pp. 1–16.Google Scholar
Demsetz, H., 1982. The growth of government. In Economic, Legal, and Political Dimensions of Competition. North-Holland, Amsterdam, pp. 99–125.Google Scholar
Peltzman, S., 1980. The growth of government. Journal of Law and Economics 23:209–87.CrossRefGoogle Scholar
Gemmell, N., 1990. Public employees' preferences and the size of the public sector. Journal of Economic Behavior and Organization 14:393–402.CrossRefGoogle Scholar
Kau, J. B., and Rubin, P. H., 2002. The growth of government: Sources and limits. Public Choice 113:389–402.CrossRefGoogle Scholar
Sanz, I., and Velázquez, F. J., 2007. The role of ageing in the growth of government and social welfare spending in the OECD. European Journal of Political Economy 23:917–31.CrossRefGoogle Scholar
Brennan, G., and Buchanan, J. M., 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge University Press, Cambridge U.K.Google Scholar
Tridimas, G., and Winer, S. L., 2005. The political economy of government size. European Journal of Political Economy 21:643–66.CrossRefGoogle Scholar
Brander, J. A., and Spencer, B., 1994. Trade adjustment assistance: Welfare and incentive effects of payments to displaced workers. Journal of International Economics 36:239–61.CrossRefGoogle Scholar
Cassing, J. H., 1980. Alternatives to protectionism. In Leveson, I. and Wheeler, J. W. (Eds.), Western Economies in Transition: Structural Change and Adjustment Policies in Industrial Countries. Westview Press, Boulder CO, pp. 391–424.Google Scholar
Cassing, J. H., Hillman, A. L., and Long, N. V., 1986. Risk aversion, terms of trade variability, and social consensus trade policy. Oxford Economic Papers 38:234–42.CrossRefGoogle Scholar
Ethier, W. J., 2004. Political externalities, nondiscrimination and a multilateral world. Review of International Economics 12:303–20. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), 2008. The Political Economy of International Trade Policy and the World Trade Organization. Edward Elgar, Cheltenham U.K., pp. 370–87.Google Scholar
Feeney, J., and Hillman, A. L., 2004. Trade liberalization through asset markets. Journal of International Economics 64:151–67. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), 2008. The Political Economy of International Trade Policy and the World Trade Organization. Edward Elgar, Cheltenham U.K., pp. 173–89.Google Scholar
Hillman, A. L., and Moser, P., 1996. Trade liberalization as politically optimal exchange of market access. In Canzoneri, M., Ethier, W. J., and Grilli, V. (Eds.), The New Transatlantic Economy, Cambridge University Press, New York, pp. 295–312. Reprinted in W. J. Ethier and A. L. Hillman (Eds.), The WTO and the Political Economy of Trade Policy, Edward Elgar, Cheltenham UK, 2008, pp. 290–307.Google Scholar
Schonhardt-Bailey, C., 1991. Specific factors, capital markets, portfolio diversification, and free trade: Determinants of repeal of the Corn Laws. World Politics 43:545–69.CrossRefGoogle Scholar
Garen, J., and Trask, K., 2005. Do more open economies have bigger governments?: Another look. Journal of Development Economics 77:533–51.CrossRefGoogle Scholar
Rodrik, R., 1998. Why do more open economies have bigger governments?Journal of Political Economy 106:997–1032.CrossRefGoogle Scholar
Grossman, H. I., 2002. Make us a king: Anarchy, predation, and the state. European Journal of Political Economy 18:31–46.CrossRefGoogle Scholar
Hobbes, T., 1651/1962. Leviathan (or the Matter, Forme and Power of a Commonwealth Ecclesiastical and Civil). Collier Books, New York.Google Scholar
Locke, J., 1960/1690. Two Treatises of Government. Lazlett, P. (Ed.), Cambridge University Press, Cambridge U.K.Google Scholar
Rowley, C. K., 2001. Constitutional political economy and civil society. In Mudambi, R., Navarra, P., and Sobbrio, G. (Eds.), Rules and Reason: Perspectives on Constitutional Political Economy, Cambridge University Press, New York, pp. 69–96.CrossRefGoogle Scholar
Buchanan, J. M., 1975. The Limits of Liberty: Between Anarchy and Leviathan. University of Chicago Press, Chicago IL.Google Scholar
Buchanan, J. M., 1994. Lagged implementation as an element in constitutional strategy. European Journal of Political Economy 10:11–26.CrossRefGoogle Scholar
Brennan, G., and Buchanan, J. M., 1985. The Reason of Rules. Cambridge University Press, Cambridge U.K.Google Scholar
Elster, J. 1984. Ulysses and the Sirens. Cambridge University Press, Cambridge U.K.Google Scholar
Axelrod, R., 1984. The Evolution of Cooperation. Basic Books, New York.Google Scholar
Fehr, E., and Gächter, S., 2000. Fairness and retaliation: The economics of reciprocity. Journal of Economic Perspectives 14:159–81.CrossRefGoogle Scholar
Kreps, D., Milgrom, P., Roberts, J., and Wilson, R., 1982. Rational cooperation in the finitely repeated prisoners' dilemma. Journal of Economic Theory 27:245–52.CrossRefGoogle Scholar
Shilony, Y., 2000. Diversity and ingenuity in voluntary collective action. European Journal of Political Economy 16:429–43.CrossRefGoogle Scholar
Guttman, J. M., 2000. On the evolutionary stability of preferences for reciprocity. European Journal of Political Economy 16:31–50.CrossRefGoogle Scholar
Guttman, J. M., 2001. Self-enforcing reciprocity norms and intergenerational transfers: Theory and evidence. Journal of Public Economics 81:17–51.CrossRefGoogle Scholar
Brennan, G., and Pettit, P., 2004. The Economy of Esteem: An Essay on Civil and Political Society. Oxford University Press, Oxford.CrossRefGoogle Scholar
Grief, A., 1994. Cultural beliefs and the organization of society: A historical and theoretical reflection on collectivist and individualistic societies. Journal of Political Economy 102:912–50.CrossRefGoogle Scholar
Rapoport, H., and Weiss, A., 2003. The optimal size for a minority. Journal of Economic Behavior and Organization 52:27–45.CrossRefGoogle Scholar
Berg, J., Dickhaut, J., and McCabe, K., 1995. Trust, reciprocity, and social history. Games and Economic Behavior 10:122–42.CrossRefGoogle Scholar
Croson, R., and Buchan, N., 1999. Gender and culture: International experimental evidence from trust games. American Economic Review 89:386–92.CrossRefGoogle Scholar
Knack, S., and Keefer, P., 1997. Does social capital have an economic payoff? A cross-country investigation. Quarterly Journal of Economics 112:1251–88.CrossRefGoogle Scholar
Putnam, R. D., 2000. Bowling Alone: The Collapse and Revival of American Community. Simon & Schuster, New York.CrossRefGoogle Scholar
Easterlin, R. A., 1974. Does economic growth improve the human lot? Some empirical evidence. In David, P. A. and Reder, M. W. (Eds.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. Academic Press, New York, pp. 89–125.Google Scholar
Easterlin, R. A., 2002. Happiness in Economics. Edward Elgar, Cheltenham U.K.Google Scholar
Hillman, A. L., 1998. Political economy and political correctness. Public Choice 96:219–39. Reprinted in Congleton, R. D., Hillman, A. L., and Konrad, K. A., 2008. 40 Years of Research on Rent Seeking 2 – Applications: Rent Seeking in Practice. Springer, Berlin, pp. 791–811.Google Scholar
Musgrave, R., 1959. The Theory of Public Finance. McGraw Hill, New York.Google Scholar
Robbins, L., 1932 (2nd Edition 1935). An Essay on the Nature and Significance of Economic Science. Macmillan, London.Google Scholar
Willis, H. P., 1912. Political obstacles to anti-trust legislation. Journal of Political Economy 20:588–98.CrossRefGoogle Scholar

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  • THE NEED FOR GOVERNMENT
  • Arye L. Hillman, Bar-Ilan University, Israel
  • Book: Public Finance and Public Policy
  • Online publication: 05 June 2012
  • Chapter DOI: https://doi.org/10.1017/CBO9780511813788.011
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  • THE NEED FOR GOVERNMENT
  • Arye L. Hillman, Bar-Ilan University, Israel
  • Book: Public Finance and Public Policy
  • Online publication: 05 June 2012
  • Chapter DOI: https://doi.org/10.1017/CBO9780511813788.011
Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

  • THE NEED FOR GOVERNMENT
  • Arye L. Hillman, Bar-Ilan University, Israel
  • Book: Public Finance and Public Policy
  • Online publication: 05 June 2012
  • Chapter DOI: https://doi.org/10.1017/CBO9780511813788.011
Available formats
×