Economists' and society's views of the role of the state in the economy have changed remarkably over the past two centuries. Because of this, public institutions and the government's involvement in the economy have changed as well. Since 1870, government spending has increased considerably in all of today's industrialized countries. Although this increase has not been equal in all countries, it is nevertheless remarkable that the growth in public spending has been a general phenomenon despite the considerable institutional differences and geographic and language barriers that have existed among industrialized economies. Government spending increased most rapidly until about 1980. Since the early 1980s, it has been growing more slowly and in some instances has even declined. We shall argue in this book that, in spite of pressures for more public spending due to the less fiscally friendly environment that will prevail in future years because of demographic developments, public spending is likely to fall in the future.

THE PERIOD UP TO WORLD WAR I

The Dominance of Laissez-Faire

In the nineteenth century classical economists and political philosophers generally advocated a state with minimal economic functions. This attitude was in part a reaction to the major distortions that governmental intervention had caused in the eighteenth century. As Keynes put it: “Almost everything which the State did in the eighteenth century in excess of its minimum functions was, or seemed, injurious or unsuccessful” (Keynes, 1926, p. 12).