Why Both the Right and the Left Have Failed

Every American—no matter how partisan—realizes that neither major political party has had much success lately in making the U.S. economy work. President Carter was denied a second term in part because of the sad state of the economy, and President Reagan certainly has yet to deliver the prosperity he led voters to expect. We must go back to the administration of Lyndon Johnson to find a time when the economy was performing reasonably well, but it was during his presidency that today's inflationary policies began. This succession of failures should make us wonder if the familiar economic ideologies of the Right and the Left are sufficient to deal with the current economic crisis.

The experience of other developed countries offers still more reasons for questioning these ideologies. None of the doctrines is sufficient to explain why some economies have been performing relatively well while others have been doing poorly.

Great Britain's economic performance has been worse than that of any comparable country. This poor-growth performance began in the last two decades of the nineteenth century, when that country had perhaps the closest thing to laissez-faire that the world has seen, became conspicuous after post-war Labour governments had created a welfare state, and continues today under Prime Minister Thatcher's Conservative government.

The Federal Republic of Germany and Japan, by contrast, enjoyed "economic miracles" after World War II, and lately have suffered less stagflation than Great Britain and the United States. I suggest that it was not the economic ideologies of these countries that was mainly responsible for their growth.

Within the United States the industrial northeastern and midwestern states have declined economically, while the western and southern states have grown, even though all regions of the country are subject to the same succession of national administrations and economic policies.

Interest group influence

A clue to the reason for this is offered by the lobbies that influence our political system and the groups that combine in the marketplace to raise prices or wages—the pressure groups, labor unions, farm organizations, professional and trade associations, and groups of firms colluding to fix prices. Such organizations are a disparate group, to be sure, but they all share a common problem.

All—whether acting as lobbies or cartels—provide some benefit or service that automatically goes to everyone in a category, even if they have not borne any of the costs of the collective action. If a lobby wins a tariff or a tax loophole, every firm in its category benefits. If a labor union negotiates a higher wage, every worker in its category receives the extra pay.

It follows that, at least in large groups, it is expedient to be what economists call a free rider: you get the benefits from collective action by others whether or not you have contributed. Since your individual efforts will not be sufficient in any case to change the outcome appreciably, it pays to "let George do it." But George also is better off if he contributes nothing. The individual bears all of the costs of any action he or she takes in the interest of the group, and in a large group gets only a minuscule share of any gains brought about. Thus, it is irrational to contribute voluntarily.

Those large groups that succeed in organizing have devices (often covert) that can punish the individuals who refuse to join or reward those who do. These range from the union shop, the "closed bar," and social pressures, to health and welfare benefits and patronage dividends. Any large organization for collective action that lasts has some selective pressures or rewards that, unlike the collective benefits the individual would get anyway, offer the individual an incentive to participate.

The few versus the many

Since large-scale collective action requires coercion or subtle rewards, and these inducements are difficult to arrange, it can take a very long time before any given group succeeds in organizing. In particular, both favorable circumstances and able leadership are needed for success. A favorite example: when a large shipment of ripe strawberries arrived at a warehouse on a hot day and needed immediate shipment to retailers, a young Jimmy Hoffa seized on that moment to organize the workers into a union. In early society it takes a long time before every group will have both the circumstances and the leadership needed to organize.

Once an organization is successfully established, however, it is likely to keep going indefinitely unless destroyed by sole violent upheaval. The officers are not likely to close down an association that gives them jobs and power, and members can be retained by the devices that require or reward membership. Thus, any society that does not destroy organizations for collective action in violent convulsions will accumulate more of them as time goes on.

Such organizations lobby for special legislation—government subsidies or tax loopholes—or restrict the supply of goods or workers' output to obtain monopoly prices or wages. Special interest legislation and cartelistic prices and wages greatly reduce the productivity and efficiency of the economy. The organizations therefore usually do not produce anything themselves; rather, they struggle to get a larger share of what society provides for their members.

Just as with the free-riding individual, a typical special interest organization (representing only a small part of the whole society) receives all of the extra shares of society's output that it has won in distributional struggle. But it bears only a minuscule share of the loss in society's productivity. Accordingly, most special interest groups are like wrestlers battling over the contents of a china shop: they destroy more than they carry away.

In some parts of the world, such as Scandinavia and West Germany, some organizations encompass such a large part of society that their members bear a large share of any loss in society's productivity that results from the organization's policies. Such an encompassing organization has an incentive to keep any reduction in society's output to a minimum. Tellingly, some of the special interest organizations in the United States or in Great Britain encompass enough of the society to have an incentive to take into account the effects of its policy on the productivity of the society.

Now we see why Germany and Japan enjoyed economic miracles. Totalitarianism and Allied occupation destroyed their special interest groups, and some of the organizations that have been created since the war are relatively encompassing. South Korea and Taiwan have grown so rapidly because, as colonies of Japan, they had not been allowed to develop independent organizations.

Britain is the slowest growing of the developed democracies because it has the longest history of stability and freedom from invasion. In the United States, the older northeastern and midwestern states are declining economically because they have had a longer time to accumulate special interest organizations than the more recently settled West or the defeated South. Neither of the political parties can make the economy work any longer because the special interests are more numerous than ever, and neither the left-wing nor the right-wing ideologies recognize this.

Steps in the right direction

The situation is depressing. Is there any way to alleviate or eliminate the problem apart from a violent upheaval in the political system? Yes, there are some actions that probably would ease the problem now, and a fundamental solution might be feasible later.

The situation might be improved a little by encouraging special interest organizations to become more encompassing. They still would be concerned mainly with distributional struggles rather than production, but they would then have an interest in minimizing the loss in output that results from such struggles.

A better way to lessen the problem is promised by some remarkable examples of economic growth. The six founding partners of the European Common Market grew rapidly in the 1960s. Germany, a relatively poor area in Napoleon's time, grew rapidly after it created its Zollverein, or customs union, and then established a unified state. Japan began to grow rapidly after its Meiji restoration in 1867-68. Going farther back, Great Britain began its commercial and then its industrial revolution after strong monarchs or central governments replaced its mosaic of medieval fiefs and semiautonomous towns with a unified nation-state. The United States grew impressively in earlier periods of its history.

In all of these cases, a much wider market was created within which free trade prevailed, either by agreement to eliminate tariffs or by national unification that eliminated local restrictions on trade. The power to determine many economic policies was shifted to some larger jurisdiction.

The widening of the market took away the restrictions that protected the special interest groups from outside competition. In preindustrial Europe and in Japan these special interest groups mainly were guilds, especially those of merchants and masters. As soon as consumers were free to buy manufactured goods and handicrafts produced outside of their town, more efficient industries sprang up in rural areas, new towns and suburbs—places with no guild restrictions. The shift of economic policymaking to larger jurisdictions required lobbies of a larger scale that could not be created quickly, so the guilds could not get the government to repress the industry.

Freer trade also can ease the current economic crisis. Indeed, such international trade as we now permit is forcing the United States to reform or move out of highly concentrated and heavily unionized industries, such as steel and automobiles, into areas, such as high technology, where there are fewer special interest organizations. If America takes the road to a brighter economic future, it will drive in foreign-made cars.

Eventually, the problem might be solved by tackling it head on. If the diagnosis set forth here should someday come to be generally accepted, then policies to cure the disease would become politically feasible. National leaders could simply repeal all special interest legislation and vigorously and impartially apply antitrust laws to every combination to obtain monopoly prices and wages. But this will not happen until either the left-wing ideology, or the right-wing ideology, or both of them, begin to take account of the most serious obstacles to economic progress that the nation faces.