THE RENEWED EXTENSION OF GOVERNMENT
CONTROL OF ECONOMIC LIFE

ANNUAL ADDRESS OF THE PRESIDENT OF THE AMERICAN ECONOMIC ASSOCIATION

BY DAVID KINLEY, OF THE UNIVERSITY OF ILLINOIS

(From the American Economic Review, Supplement, March, 1914)

For some twenty-five years there has been a marked recession among English-speaking peoples from the strong individualism of the early 19th century towards a gradual extension of government authority in economic matters. Laissez-faire has been discredited both as a principle of political philosophy and as a rule of conduct. Whether we should try to restore its prestige or with what other principle we shall replace it, however, are matters concerning which current discussion is somewhat confused. On the one hand are those who declare that competition has broken down, and has produced a monopolistic system which will in time completely supplant it, and which is of such tremendous extent and power that it can be managed only by the government. On the other hand are those who believe that competition is a force which should be preserved as a ruling power in economic life, and would therefore prevent by government action the establishment of monopolies and break them up where they are already established. This, in substance, is the policy that our own federal government has been pursuing since the enactment of the Interstate Commerce Law in 1887. Still others urge that all we need to do is to prevent the evils of excessive competition by setting limits. within which competitive forces must work. The first group of thinkers take the socialistic view and call for government ownership or at least for direct government management. The second group are still in effect believers in the laissez-faire principle, and think to restore it by destroying monopoly. The third group also are still faithful to their belief in the efficacy of competition but would restrict its field of operation at the bottom so as to prevent industrial degradation.

reservation, in state constitutions or statutes, of the power to repeal or amend corporate charters. These reservations, while of considerable value, have not been entirely effective to safeguard the public interest. A corporation may be killed, but its privileges usually survive its death and inure to the benefit of the incorporators. A curious example of the far-reaching influence of this decision is found in Muhlker vs. N.Y. and Harlem R.R. Co., 197 U.S. 544, 571. According to this and other similar cases, a state judicial decision merely declaring the law or interpreting a constitution or statute, may be held to be a violation of the prohibition forbidding a state to "pass any .. law impairing the obligation of contracts." See also an article by W. F. Dodd on "Impairment of the Obligation of Contracts by State Judicial Decisions," in Illinois Law Review, October, 1909.

A centralizing tendency, that is, a departure from the principle of individual liberty and a return to the principle of authority, is to be seen in many if not all domains of thought at the present time. Therefore, to understand properly what is going on in industrial life we need to look at the change that is going on in other life spheres. The terms laissez-faire and competition are commonly used to describe the policy more properly called economic liberalism. But economic liberalism is more than a political platform or an economic formula. It is a system of culture that has given character to the life of a great people for more than two centuries. It is a superstructure erected on the principle of personal liberty in religious and political matters. The 17th century was an era of religious contest that resulted in the establishment of ecclesiastical independence, which in turn carried the rule of individualism to constitutional and political emancipation. Once established in religion and politics, the principle of personal independence found its way into economic conduct, and the system was thereby made complete. Just as in its upbuilding it was closely connected with personal liberty in other spheres of life, so the present alleged breakdown of competition - the principle of personal liberty in economic life - and the alleged restoration of the principle of authority finds its counterpart in the movement towards church unity, uniformity of creed, the extension of state as against local authority over education, the extension of the federal principle in politics, and the widening censorship of morals. The application of the authoritarian principle is being made in these lines for reasons quite similar to those that are causing its application in industrial affairs. The excesses of the personal liberty system in morals, religion and literature, have produced results that are shocking the sensibilities and shattering the ideals of multitudes of people. Hence, the demand for control. In politics the extreme application of the principle of local government has rendered equity, justice, and efficiency impossible in a multitude of ways. Hence, the demand for state and federal control.

Under no system of government regulation of conduct, however extensive or intensive, has competition or personal initiative been entirely absent, unless, indeed, under a system of slavery; and at no time, under the most extended system of competitive action, has it been possible to do away entirely with government supervision and regulation. Even among the English-speaking peoples in the past two centuries, when the laissez-faire aspects of economic liberalism have seemed to predominate, it has not been possible to get on without government regulation and supervision. The reason is that the knowledge and resources underlying any political and social system are constantly changing. Whether the principle of personal liberty, expressed through competition, or the principle of authority, expressed through government regulation, shall be the dominating principle

of civilization at a particular period, depends on which one of them is likely, under existing conditions of knowledge and resources, most largely to promote welfare. When evils flow from the too extensive application of the prevailing principle, or, when, in new circumstances, it is less productive of welfare, emphasis is gradually shifted until the other principle occupies the foreground and becomes the dominating force. Such is the situation now. Conditions have changed so that the necessity and value of regulation are emphasized again. The régime of personal freedom of competition under the conditions of rapid scientific discovery and material growth has failed to preserve, or perhaps to produce, the equality necessary for success among competitors. Growing population, the development of vast resources, the great size of units of industry, have made the application of the competitive principle in many ways impracticable. Competition has degenerated at many points from a struggle between equals to an exploitation of the weak by the strong Industry has been swallowed up by industry until in many lines a practical monopoly exists, so that prices, wages, terms of employment, and the welfare of large numbers of people, are in the control of comparatively few. The benefits of the common heritage of natural resources have passed too largely from the people at large. On all sides we find private monopolies and a natural system of capitalistic industry, involving large control of the opportunity for livelihood for the many. These evils have been produced, under conditions favorable to the acquisition of great wealth and its massing under the corporate principle, by a system that gave the world a "democratic constitution," "the same law for all," "toleration," "capitalistic competition," "individual initiative," and the other benefits of liberalism In more general terms, the causes for the extension of government control are: the ill-doing of some under the competitive system; our desire for rapid national development, which led us to give large powers to those who were to assume the risks of frontier promotion - powers which, then innocuous, have now become dangerous; a demand for a better standard of living by the great body of the working class, who are asking with some show of reason what the advances in science and industry have done for them. Moreover, there is a feeling of resentment of control by others of their opportunity to make a living.

The demand for state regulation either for the purpose of restoring the competitive principle in industry, or frankly supplanting it with the principle of authority, finds some justification, too, in the belief, not altogether ill founded, that the economic evils of great industry have arisen in part from the treatment of the modern form of the corporation by our courts of law. They have given it in a measure the attributes of a natural person, without imposing upon it the consequences of personal responsibility. Hence, it has frequently been

impossible to reach the misdeeds of individuals because of their attribution to non-personal agents. Penal remedies and preventive measures alike have been often ineffective to protect the public. Consciousness of this evil is seen in the demand for holding directors of corporations to personal responsibility for the acts of the corporation, and in the movement for the disruption of "corporations of corporations."

From all these causes arises the demand for government protection for the weak in industry; and some people appear to think that unless the right to make a living is in a reasonable measure provided, the next step may be an attack on the institution of private property itself. In consequence, "to-day a great economic movement is going on which aims at reorganizing the entire industrial system from the social standpoint." The call is for the state to look after the conditions of living and work of workers, the management of prices and output of large enterprises, or to take them over and thereby free the many from a virtual economic control of the few, and reëstablish, supposedly for all, a proper standard of welfare.

An explanation of the establishment of economic liberalism as a system, in the extreme form in which it has existed for more than a century, is found in the abnormal condition of the four centuries succeeding the discovery of America. Since that discovery the life of the world has been abnormal in the sense that it has been in a state of unstable equilibrium because of the existence of opportunities for personal initiative, personal gain, and individual expansion under conditions that yielded larger rewards than ever before. Economic pressure in the old world could be relieved by overflow into the new world. The great advantage that came from this situation is now reduced by the substantial occupation of this continent. The fact that our continent is, in the present stage of the arts, substantially occupied, indicates that the world is about to return to a more stable economic equilibrium. The development of the industrial evils of to-day and the consequent demand for regulation are simply an unconscious acknowledgment that, all things considered, we have reached in this country a stage of relatively diminishing returns. in our economic activity. It is a recognition of the truth of the law of diminishing returns and of the Malthusian doctrine of population, that unless the arts progress more rapidly than population there is bound in time to be a relative pressure of population on subsistence.

Man is so constituted that when he feels the evils of an existing system he is likely to adopt measures of reform which will produce evils as great as those he is seeking to remedy. That danger exists now. We need to look very closely at the tendency towards the extension of the authority of government into the details of our economic life. The principle of competition, the system of economic liberalism, has been too helpful to the progress of mankind to be given up alto

gether. It has become an enduring part of our civilization and philosophy of life. We cannot deny that the competitive system has promoted liberty and welfare, initiative and perseverance, industry and success, wealth and culture, an abundance that has relieved poverty, has exploited to human benefit the resources of nature more abundantly than ever before, has enlarged knowledge, has provided for the possibility of a greatly increased population, and, generally, has uplifted the life of the people. No system which will deprive mankind of these advantages is likely to promote welfare unless it supplies other motives to the same results. For/competition has been a developing force, even if it has failed somewhat as a controlling one. The motive power to action is of more importance in the long run than the regulation of action.

In order to judge clearly the reasonableness of this demand for wider government control of economic life, and possible results of acquiescence in it, we must recall for a moment the ultimate purpose of government. It is, undoubtedly, the promotion of the welfare of the people who organize it. In the words of Justice Gray," The prosecution of the safety, health, the morals, good order and the general welfare is the chief end of government," and the general welfare includes protection of opportunity to make a living. This is not a new maxim in the jurisprudence of the English-speaking peoples. The system of personal liberty and the system of government control, or any combination of them, has always had, and must always have, as its ultimate aim, among these peoples, the establishment of welfare. All social institutions, including the system of private property, are encouraged, or permitted, for this end. As Justice Bruce of the Supreme Court of North Dakota has put the matter: "It can now be safely said that the courts and the public generally have come to see and to hold that a right to property and liberty should never be guaranteed in matters and things which are injurious to the public health, the public welfare, or the public morality, or even to the convenience of the public as a whole."

As we have seen, the call for the application of the power of government assumes several forms. Some call upon it to restore the competitive principle by breaking up large industries, and so to regulate business that competition will operate within certain assigned limits. This is the neomercantilism that is sweeping over the world. Some call upon it to assume that competition as a regulative force is dead, and therefore to permit monopoly under supervision. Others insist that since competition is dead and monopoly established the government itself shall take over and manage the greatest of these monopolies. This is the demand of the socialists.

It is not worth our while to consider the last proposal. There is no evidence worth considering that the American people have yet